What Canadians should know about that $1.9 billion surplus announced by Tories

If you happen to catch the Globe and Mail’s election leaders’ debate on the economy Thursday (online and on CPAC TV at 8 p.m. ET), you’re going to hear Prime Minister Stephen Harper use one word a lot: surplus.

This week his Finance Department released figures that showed the Conservative government inched into the black for the 2014-15 fiscal year that ended in March, posting a $1.9-billion surplus and ending six consecutive years of deficits under the Tories.

Some observers had forecast a deficit of up to $2 billion and in its original budget documents last year, the government projected a $2.9-billion deficit, followed by a $6.4-billion surplus in 2015-16.

But this surplus was not unexpected. The Parliamentary Budget Officer predicted last April the government would rack up a $1.8-billion surplus, a year ahead of expectations, though his revised projections show a deficit for the the 2015-16 fiscal year.

The news is a windfall for the Conservatives who are using it to revive their main campaign theme that Harper is the most reliable hand at the economic tiller.

Still, Canadians might wonder how there could be a $4-billion swing between predictions of how Ottawa’s balance sheet would end up.

There are two answers to that question. The first is that it’s complicated and the second is that it doesn’t matter, except politically.

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The overall federal budget for 2014-15 was set at $279.2 billion. Canada’s economy, measured in gross domestic product, was worth almost two trillion dollars last year.

“The economy is just so big that one billion this way or that way could even be a rounding error, especially when you get revisions,” says University of Toronto political scientist Nelson Wiseman. “But it does matter politically in a very big way, especially this week because of the leaders’ debate.

“So you’re going to have crowing from the Conservatives about it and crowing about it not just in the debate. It’s going to be woven into Harper’s stump speech every day between now and the end of the campaign.”

Never easy to hit budget targets exactly, expert says

Given all the variable factors that determine final budget figures, it’s never easy to come out precisely on target, says Alexandre Laurin, director of research at the non-partisan C.D. Howe Institute.

“There’s a range it makes sense to be in and a range where really it’s over the top,” he said in an interview with Yahoo Canada. “Within a billion you’re pretty much on target.”

This surplus was attributed to tax revenues that were $1.5 billion higher than expected, despite tumbling oil prices, and government spending that was less than projected.

The Conservatives inherited a sizable surplus when they took power from the Liberals in 2006 but the global financial crisis of 2008 forced the government into massive expenditures to help stimulate the economy and dampen the recession.

Harper promised to bring the budget back into balance but Laurin there were limits to where Ottawa could restrain spending because the lion’s share involves mandated health, social and other transfers to the provinces and to individual Canadians for such things as Old Age Security.

“Those are huge expenditures in the budget,” he said. “That $280-billion budget, this is like two thirds of it.”

The government instead slashed departmental spending, which has led to tension with its public sector employees and groups such as military veterans over office closures and alleged under-funding of services. Veterans Affairs Canada, for instance, has returned $1.13 billion in unspent to the federal Treasury since 2006.

“From the government’s perspective it was pretty important to them to show they have managed to bring the budget back to balance before the election and managed to do it without cuts in transfers to provinces and drastic cuts to benefits to persons,” Laurin said. “To be fair they did do a good job at managing the cost of operations.”

The institute conducts an annual fiscal accountability of the federal and provincial governments. The latest report, released last April, shows governments are getting better at matching projected spending with revenues, with Ottawa doing the best job of all.

However, as a group they still overshot their spending targets by billions of dollars and chronically underestimated the revenue they would take in, the report says.

Laurin said these “happy revenue surprises” make it easier for governments to announce windfall spending, which the institute’s report says smacks of opportunism.

Which brings us back to the politics of budgets.

Government accounting has become more transparent

Laurin said senior governments have become steadily more transparent in their accounting in the last decade, making it easier for outsiders to assess their performance. But that doesn’t stop budgeting from becoming a political football.

During election campaigns, the parties are likely to use the rosiest revenue projections to buttress their economic promises, he said.

“They have no incentive to be prudent as long as it’s fairly credible,” said Laurin.

That’s especially true of those hoping to oust the incumbents. After they win, though, they’ll often claim that a fresh examination of the public accounts reveals things are much worse than expected. So promises they made during the campaign are suddenly off the table.

“It’s de rigueur that when a new party comes in, they claim the books aren’t as clean or as good as they’d been led to believe,” said Wiseman.

You’re more likely to encounter this in provincial elections, said Laurin.

“In all fairness I think it’s more of a provincial problem than a federal problem just by the nature of their budgets,” he explained.

The provinces deliver 85 per cent of all public services to citizens, so their spending habits are more complicated and vulnerable to wide variations. It opens the door to post-election letdowns.

“You always over promise and when you get elected there’s not enough revenues and you need someone to blame,” Laurin said.

Wiseman, U of T’s director of Canadian studies, noted the Ontario Liberal opposition accused the outgoing Tory government of Mike Harris in the late 1990s with claiming to have balanced the budget when in fact the provincial auditor-general later found a massive deficit.

And in British Columbia political wonks are still debating the NDP’s so-called “fudge-it budgets,” when their governments in the 1990s were accused of playing with the books to hide their deficit spending.

Another trick, Wiseman said, is for new governments to pile lot of spending into the current fiscal year

“They will dump a lot into that year to show an even higher deficit than would have been the case,” he said.

“So if the NDP or Liberals win what they’ll do is they’ll say, oh, actually the government said it was going to have a surplus this year … and actually it’s a deficit of $5 billion, or something like that. And that will allow them to have a cleaner slate for the next fiscal year.”