Program cuts may be path to balanced federal budget

[Prime Minister Justin Trudeau (L) and Finance Minister Bill Morneau walk to the House of Commons to deliver the budget on Parliament Hill on March 22, 2016. REUTERS/Patrick Doyle]

The Trudeau government may have to make significant program cuts to pay down the deficit as its five-year budget plan shows an overall slowdown in spending while infrastructure expenses climb.

The Liberal budget plan released on Tuesday projects a 2016-17 deficit of $29.4 billion. The government says its goal is to balance the books in about five years though the budget does not show a balance within that time. It instead forecasts the shortfall will shrink to $14.3 billion in 2020-21.

“They’ve got to be cutting back somewhere else,” said RBC economist Paul Ferley, noting that the government’s five-year projection for smaller deficits and larger infrastructure spending come at the same time as a deceleration in overall government spending. “They’re saying that it’s coming out from a real slowing in expenditure growth. We don’t know where that’s going to be achieved.”

NDP finance critic Guy Caron agreed that program cuts may be part of the plan to balance the books.

“That’s the concern we had during the campaign,” Caron said. “The only way they could do it would be through cutting.”

The Liberals said in February that slow economic growth had created a bigger hole in the deficit than expected, dropping November’s near-balanced-budget shortfall of $3.9 billion for fiscal 2016-17 to a much deeper hole of $18.4 billion. That was before any of the new spending was announced on Tuesday.

The Liberals suggest the deficit can be paid down through revenues from rising economic growth. But the budget plan indicates some program review and a move to “eliminate poorly targeted and inefficient programs,” starting with a $221 million cut to spending on government services, travel and advertising.

The government will also review programs to “better align government spending with priorities” and review the tax system for the possible elimination of “poorly targeted and inefficient tax measures,” the budget plan said, a likely reference to targeted tax measures introduced by the Tories.

Going into the red may present the Liberals with as many opportunities as challenges. Like former prime minister Stephen Harper and his deficit-funded stimulus plan during the 2009 recession, the Liberals’ large fiscal hole gives the government flexibility to invest in programs it likes and cut others.

“They’ve got the latitude to do new things as opposed to (having) an austerity budget,” said Nik Nanos, head of polling firm Nanos Research. “The budget allows the Liberals … to review programs and tax credits that were implemented by the Conservatives. It seems like the Liberal government is not hot on bespoke, targeted little tax credits for segments of voters.”

The Liberals have not indicated big cuts as a way to reduce the deficit, though the budget plan introduced savings by deferring a small business tax cut and eliminating some Tory-introduced tax credits such as one for fitness.

Prime Minister Justin Trudeau told CBC Radio in an interview on Wednesday that increased economic growth may provide enough of a boost to government revenues that balanced books could be reached in five years.

“There is a track to that if we increase the growth in the economy,” Trudeau said.

The budget projections allocate a $6-billion contingency fund, giving the government even more room to shrink the deficit. The Liberals also forecast lower economic growth than that of private-sector economists, providing additional fiscal room if the economy performs well.

“The bottom line is they built in some cautious assumptions on growth,” said TD economist Derek Burleton. “They may find that they have more wiggle room going forward. We all remember back in the (Paul) Martin era, how they set low targets in the hope of leaping above them.”

Ferley added that if economic growth comes in moderately as the Liberals forecast, cutting is not the only possible way to balance.

“The other alternative is on the revenues. Raising taxes becomes an option,” he said.

Finance Minister Bill Morneau said on Tuesday the government’s infrastructure spending would generate more in economic growth than the government invests.

“We believe that through these investments we can get to a growth rate that’s going to put us in a continuing, strong fiscal position,” he said. “We’re going to get ourselves to a balanced budget. It’ll take a few years but we’re going to get there.”

Daniel Lauzon, a spokesman for Morneau, did not directly address the possibility of cuts but said by email "our priority is making investments to grow the economy and help middle class families."