- No material change to deficit
- Meaningful reduction in amount of capital grants and capital investment
- Weaker tax revenue
- Spending creeps up
On 28 November, Treasury Board President and Finance Minister, Joe Ceci released the 2nd Quarter Update . The bottom line deficit, forecast at $10.497 billion in April’s budget, is now estimated to be $10.314 billion. Although the economic update was upbeat- the economy resuming growth of an estimated four per cent- the fiscal situation remains sobering.
The narrative in the ministry has shifted somewhat in the past three months. Mr. Ceci has spoken out about the importance of low salary settlements with public sector unions. The Premier has talked about “compassionate cuts.”
It is evident that the government has now discovered the big “painless” expenditure cuts can be found in capital budgets. These budgets have been pruned by a total of $883 million. The report attributes the reduction to “re-profiling of school, municipal, health and post-secondary facilities, continuing care, housing and other projects to future years, and savings on projects, partly offset by increases related to projects carried over from 2016 -17.”
This re-profiling has two significant implications. Firstly, it borrows a leaf from the Klein cutback years of the mid-nineties when capital spending was reduced as part of the deficit elimination and debt elimination plan. Secondly, the deferral reduces financial requirements by $1.3 billion. The rationale? With the economy recovering, it is time to lift the governmental foot off the capital spend accelerator. And indeed, there is merit in this and we anticipate that Budget 2018 will include a sharper re-profiling of capital projects. This will be part of a “credible” plan to reduce spending and borrowing requirements. Nevertheless, operating spending, especially, health and education, consuming a whopping 72 per cent of operating spending, will remain the chief budgetary nut to crack.
In spite of the promising economic outlook, the return to positive employment performance, and return to profitability by oil companies, tax revenue fell by $503 million from budget. Personal tax revenue was down $339 million from budget and the tobacco tax declined from budget by $98 million. Personal taxes, expected to be higher due to increases on higher income earners, disappointed. This lower take is probably due to high earners’ capacity to move various forms of income into a lower 2016 tax year.
Bitumen royalties came in $671 million lower than expected. Assumptions for Hardisty crude were moved to $47.13 per barrel from $51.30 and natural gas from $2.90/GJ to $2.20/GJ. However, conventional crude and bonuses and sales of Crown leases were higher, netting the royalty sub-total $96 million higher than budgeted. Another positive has been investment earnings expected to be nearly $300 million higher. A leading revenue item that has improved are motor vehicle license revenues which were up by $20 million. This line item is highly sensitive to economic developments and is a precursor to improvements in the retail sales environment.
Net income from government business enterprises is $120 million lower than budget. While ATB Financial projects higher earnings, the Balancing Pool is going to become a constant drain as payments to retire the Power Purchasing Agreements come home to roost.
The report highlighted efforts to manage spending including :
- Elimination or amalgamation of a number of agencies, boards and commissions
- Consolidation of common functions across government, such as IT, finance and communications
- Limiting discretionary spending and restraining hiring
- Examining best practices to find efficiencies, such as reducing health drug costs .
- Salaries for management, including in agencies, and for political staff, have been frozen for several years, or cut . Bargaining in various sectors underway is being pursued with goals of protecting jobs and programs, through an affordable public service.
Unlike capital spending, where “realized savings” are in the hundreds of millions of dollars, operating expenses have been sliced by tens of millions. It is unlikely that the government will be able to reduce spending significantly unless it makes hard choices to reduce or eliminate programs. Given a provincial election is less than 18 months away, such policy choices become politically difficult.