Budget 2016—spending is driving the deficits

Leading up to their first budget, the Liberals argued that deteriorating economic conditions would require the government to run much larger deficits than had been promised. And the budget did indeed produce bigger deficits. But deteriorating economic conditions and resulting weakness in revenue growth aren’t why the federal government will be in deficit in the years ahead. The real source is a marked increase in spending.It’s true that projections for a slower growing economy this year are causing government revenues to be lower. However, some context is necessary to understand the modest scale of the revenue decline. Consider that in 2016/17 federal revenues are projected to be $3.5 billion lower than in the previous year—a drop of just 1.2 per cent. By comparison, federal revenues fell by $15.2 billion (6.4 per cent) in 2009/10 when the economy was actually in recession, which it is currently not.And according to the government’s revenue projections, $2.7 billion (or nearly 80 per cent) of the $3.5 billion revenue reduction is due to a one-time reduction in revenues from Crown corporations, not a weak economy.Can the $3.5 billion projected decline in revenues be blamed for the emergence of a $29.4 billion deficit?Hardly. The reason for the larger deficits is that the Liberals have decided to push ahead with dramatic spending increases (see chart below).In 2016/17, the government proposes to increase program spending by $20.5 billion—a 7.6 per cent jump. This increase is even more dramatic considering that program spending in 2015/16 is up 6.7 per…Read More…

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