Morneau's forecast of spending cuts in government operations raises questions about deficit projections



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Finance Minister Bill Morneau speaks to reporters in Ottawa, Ontario, on Thursday, November 22, 2018.

Sean Kilpatrick / The Canadian Press

This week's economic downturn includes projections that Ottawa will spend billions less on operating expenses, an assertion that is drawing skepticism from a team of economists who doubt that these economies materialize.

While conservatives have attacked liberals this week as reckless spenders, details of the government's tax plan indicate that staff and other basic costs of federal departmental and agency management are expected to fall as interest rates rise.

The update said federal operating spending will fall from $ 100.3 billion this year to $ 96 billion in 2019-20 – an election year – and fall further to $ 95 billion in 2020-21.

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The broader category of total program spending – which also includes transfers to individuals and other levels of government – is expected to increase to $ 370.8 billion from $ 320.2 billion over the next five years. However, liberals expect the economy to grow, so the increase would represent a cut in spending when measured as a percentage of gross domestic product, dropping from 14.4 percent in 2018-19 to 13.8 percent in 2023-24.

Randall Bartlett, chief economist at the Institute for Fiscal Studies and Democracy at the University of Ottawa, said the government was unable to fully explain how it will achieve planned spending cuts.

"For me, it's hard to believe," he said. "They seem to be forecasting operating expenses and being overly optimistic and filling in the revenue forecast, and this is how they are finding the whole room to provide all these measures … We think the deficits will be greater."

The institute, led by former parliamentary budget officer Kevin Page, reviews departmental spending reports to produce estimates on the direction of federal finances. It foresees deficits that are greater than those projected by the finance department or the current Director of the Parliamentary Budget, Yves Giroux.

The update on Wednesday said the federal deficit will be $ 18.1 billion in 2018-19, $ 19.6 billion in 2019-20 and $ 18.1 billion in 2020-21 before falling three years.

The update did not report when the deficit will be cleared.

One section of the update said that the government will save on operating expenses because interest rates are projected to be higher in the long run by reducing employee benefit responsibilities.

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Finance department spokesman Jack Aubry said changes in interest rate expectations could make a big difference in government personnel costs.

"With interest rates projected to rise each year over the forecast horizon, the estimated value of this liability decreases, and this appears as a reduction in operating expenses. Given that these contingent pension liabilities are large, the impact is significant, "he said in an e-mail.

The government update on November 21 announced new tax incentives for companies amounting to $ 14.4 billion in revenue lost in six fiscal years. Tax exemptions will allow companies in Canada to cancel expenses more quickly when they invest in equipment and are similar to the measures introduced this year in the United States.

The new tax incentives are a response to concerns that US measures make Canada less attractive to business investment.

The United States also cuts corporate and personal tax rates, but Morneau said this week that the equivalence of all US tax cuts would be irresponsible.

"We believe we have taken a proper and balanced approach that allows us to be fiscally responsible at the same time," Morneau told reporters Thursday morning.

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The upgrade also accounted for $ 15.4 billion over six years of spending ads that Ottawa has made since the February budget launch.

Craig Alexander, chief economist at Deloitte Canada, said the government is correct in saying that higher interest rates will reduce staff costs in the long run. However, Alexander said he was not in a position to comment on the accuracy of operating expense forecasts because he does not study departmental reports as close as Bartlett.

Alexander said the projections announced on Wednesday did not leave federal liberals much room for a large pre-election budget in 2019, especially if the economy is below expectations.

"What the government probably expects is that revenue growth will be higher than expected, spending will not be as high and as a result, they will have more fiscal space in the spring to make new announcements," he said. "But if the economy slows down, I think they will lose fiscal space to maneuver without running an even larger deficit."

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