Mommy, Where Do Deficits Come From?

Political debate and media reporting on today’s economic “Report to Canadians” have emphasized one of the first tables in the document, in which the government claims to have “committed” 80% of budgeted stimulus spending (page 14 of 230).

Equally interesting, but perhaps less noticed, are the two “Fiscal Outlook” tables near the end of the document (pages 219 and 221). They provide an accounting of the $50-billion deficit figure, which I summarize below:
Federal Fiscal Projections ($ billions)

 

Budget 2009

Today

Changes

Revenue

$224.9

$220.2

($4.7)

EI Benefits

$ 18.9

$ 21.7

($2.8)

Transfers to Persons

$ 47.4

$ 47.4

Transfers to Governments

$ 50.1

$ 50.9

($0.8)

Direct Programs

$112.7

$121.2

($8.5)

Debt Charges

$ 29.5

$ 29.2

$0.3

Deficit

$ 33.7

$ 50.2

($16.5)

 

Until now, all we knew was that this year’s deficit would exceed the Budget 2009 projection by more than $16 billion. We could guess why, but now we know.

Projected revenue is down by $4.7 billion, which is not surprising given that the economy is in even worse shape than projected in Budget 2009.

Employment Insurance (EI) benefits are costing $2.8 billion more than projected. As Andrew argued before today, EI should not be blamed for Canada’s rising deficit. Indeed, it accounts for just 17% of the additional shortfall (2.8 / 16.5 = 0.17).

Transfers to provincial and territorial governments are up by $0.8 billion, mostly to top up the Canada Health Transfer.

Direct program spending is up by $8.5 billion, almost entirely to account for the auto bailout. The document explains (page 220):

In accordance with the Government’s accounting policies, the value of loans, investments and advances are adjusted in the financial statements to approximate their estimated net realizable value. This will be done when the 2009-10 financial statements are prepared in the summer of 2010, based on information available at the time. To be prudent, the Government is setting aside an additional $8 billion in 2009-10 to account for these adjustments.

In other words, the government does not have an estimate of what its equity in GM and Chrysler may be worth, so it just decided to add $8 billion to this year’s deficit. Coincidentally, this amount is precisely enough to push the total deficit past the $50-billion mark.

The fact that half of the deficit increase results from an arbitrary accounting decision, rather than from concrete economic developments, supports my previous suspicion. In announcing a $50-billion deficit – even before today’s “Report to Canadians” – the government was pulling out a rhetorical club with which to beat back opposition proposals for more stimulus spending and EI improvements.

Finally, the government will pay $0.3 billion less than budgeted in interest charges on the debt. Lower interest rates are the silver lining on the economic crisis.

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