OTTAWA — The ballooning federal budgetary deficit will likely add more than $200 billion to the national debt and may prove difficult to tackle without tax increases, says a new analysis from Dale Orr Economic Insight.
The fresh look at the deficit — which the government reports is well on the way to a record $56-billion shortfall this year — casts in doubt the Harper government’s contention that it can grow itself out of the hole.
But the new estimates also didn’t completely side with the assessment by Parliamentary budget officer Kevin Page that the deficit has become chronic, or structural.
Instead, economist Dale Orr, who has often written on the government’s fiscal position, comes down somewhere in between.
Finance Minister Jim Flaherty has brushed aside Page’s findings of a structural deficit as mere “speculation,” but has not given a date for balancing the books.
Orr agreed that the government could grow out of the budgetary deficit in seven years, given current projections of economic activity.
But he said Flaherty could only achieve that goal if he somehow managed to curtail annual growth in spending to an average of three per cent — less than half the rate of increase prior to the recession, when the economy was thriving.
With inflation likely to average about two per cent and Ottawa pledging not to slash transfers to provinces and individuals by much more than inflation, that’s a Herculean task, Orr said.
“The government’s plan is not realistic on either the revenue or the spending side,” said Orr. “Furthermore, it is misleading, and beyond that, it is not the best route to deficit elimination.”
Orr says Ottawa could get itself out of the hole by temporarily restoring the GST to seven per cent for two years starting in 2015, which would eliminate the deficit that year.
It could then afford to reduce it to six per cent in 2017 and back to five per cent in 2018.
Ottawa’s treasury is expected to get help soon from one source — corporations, which in the past year have sliced a large chunk of cash from the federal revenue stream.
Because many firms went from profit to loss in the past year, they have stopped paying income taxes and in some cases have received refunds. On Friday, Ottawa reported business tax receipts were down $7.4 billion in the first eight months of the fiscal year, more than the revenue fall-off from personal taxes.
But CIBC World Markets said Monday that the earnings recession among Canadian businesses ended in the last quarter of 2009, with operating profits expected to average 43 per cent in the quarter. That is the first increase in a year.
CIBC’s Peter Buchanan said that seven of 10 major Toronto Stock Exchange sectors are expected to show improvement on the year.
But as the Bank of Canada has noted, future growth in Canada will be still be restrained by the softness of the American recovery and the aging population, which will reduce the number of workers contributing to economic activity.
Budget watchdog Page has estimated the demographic effect will be so pronounced in the next five to 10 years that the government will be stuck with a $20-billion deficit even after the economy has fully recovered.
That’s because while total revenues will grow, the increase won’t be enough to overcome the additional costs for pensions and old-age security payments, not to mention higher health-care costs.
Orr doesn’t fully agree, but predicts that the government’s projections for reducing the deficit will start going awry in 2013-14.
Even under the government’s scenario, Orr says the recession and its aftermath will add about $180 million to the national debt, increasing Ottawa’s interest payments.
Bringing spending growth to a still modest four per cent a year would mean Ottawa would stay in deficit until 2020-21 and add about $220 billion to the debt.
“It’s the tyranny of small differences,” he explained. “If you don’t keep spending growth close to three per cent, you are in real trouble.”
The prime minister installed former trade minister Stockwell Day to the Treasury Board last week, reportedly to lay down a blueprint for cutting spending.
But Orr’s report points out how difficult that will be when transfers to provinces for such things as health care and to individuals for things like pensions continue to grow faster than inflation.
With big cuts to transfers off limits, Orr estimated Ottawa would have to keep growth in direct program spending at under one per cent for seven years.
Defence accounts for 19 per cent of direct program spending, and aboriginal programs account for another seven per cent, but both would be politically difficult to slash, he said.
Even freezing salaries for the public service would yield only $500 million in annual savings. The only way to make significant savings on the public payroll would be to stop hiring and leave vacancies unfilled, which would affect services and fly in the face of the government’s stated goal of attracting new talent to the public service, he said.