...against fictions and other tall tales

Saturday 10 March 2012

The federal government: A big spender?

On March 29, Canada's federal minister of finance will table the budget for the upcoming fiscal year.  As always, in the weeks leading to "budget day", Canadians will be bombarded by commentaries from reporters, economists and politicians about the (supposedly) worrisome size of the federal budget deficit.

Just to put things in perspective, I thought it might be useful to include the following chart showing federal income and outlays as a percentage of GDP since 1990.  As you can see, federal government expenditures cannot be characterized as being out of control.  In fact, the chart shows that current federal spending is at one of the lowest levels in decades.


Rather, it would be more accurate to say that the budget deficit is being caused by the considerable decline in government tax revenues and the increase in federal transfers to persons (mostly employment insurance benefits) since the start of the downturn in 2008.  The Harper government's decision to lower the federal sales tax by two percent between mid-2006 and late 2007 is another important cause of the recent decline in federal tax revenues.

7 comments:

  1. Thanks Circuit. I appreciate the collection of stats you put up. Just a quick question. I always thought Canada's deficit in the 90s peaked around 50%. Is it possible you're missing a component?

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  2. Sorry...I meant level of spending peaked at 50%.

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  3. Dave, you are correct that Canada's total consolidated (provincial plus federal) outlays were close to 50% of GDP in the nineties. But my post above is only concerned with federal spending, which is the responsibility of minister Flaherty. March 29 will be federal budget day.

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  4. ! on your last precision. I enjoy your charts. One slight to current fiscal policy: you can't slash budgets, watch a reduction in overall economic spending, reduce taxes and suffer trade weaknesses simultaneously without a resulting squall. If it's not obvious that we're in it, then the Govt is indulging in wishful thinking. Supplement that with households almost strapped with unproductive debt and there is a challenge ahead for Parliament.

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    1. Swells, I agree with your wrap-up of the Canadian economy entirely. I'm just wondering however whether the distinction productive/unproductive applies to household debt.
      Again circuit, that was a timely post.!!

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    2. @KP. I apologize for the lack of clarity. My take is quite elementary in distinguishing productive from unproductive debt. Similar to Schumpeter (and in this case different from Minsky): debt is productive when it enhances overall productivity, growth, wealth or any combination thereof and unproductive when not. Obviously entrepreneurial initiatives and technology are highlights of the former in the case of businesses and industry. For the household sector certain expenditures such as household improvements, education and related thereof can be considered productive, whereas the routine purchasing of services, goods and vehicles are seemingly unproductive. One can push towards a taxonomy that focuses on the ROI to the household generated by the debt and apply it accordingly.

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  5. I like the way you sum it up, Swells. Wishful thinking, indeed. On a related note, I'm actually getting quite concerned with the price of oil. I don't think it'll go much higher, but it is acting awfully like a tax. It won't be long before the impact gets felt.

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