Economy Lab

Don't expect budget shock: Austerity is already upon us

Special to The Globe and Mail

Canadian flag on Parliament Hill in Ottawa (Adrian Wyld/Adrian Wyld/The Canadian Press)

The federal government has done little to dissuade people from the belief that this year’s federal budget will follow the path set out in last year’s budget. On the expenditure side ( Table 5.9), the plan for 2012-13 was to allow transfer payments to persons and to other levels of government to increase by about $5-billion and to reduce direct program spending by $2.6-billion. After taking into account one-time expenditures such as GST compensation payments, total spending was to fall by about $1-billion in 2012-13. Other numbers have been floated, such as the possibility that direct program spending may be cut by as much as $4-billion.

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What would 2012-13 look like if the government brought down a budget in which total spending was held constant, in which transfer payments grew modestly, and in which direct program spending was cut by $4-billion or so?



A proper response to this question requires a certain amount of econometric modeling, but I think we can get a rough-and-ready answer by asking ourselves what would have happened if this recipe had been applied last year. This is a much easier question to answer, because that’s exactly what has been happening.



I noted a few weeks ago that data from the Department of Finance’s Fiscal Monitor suggested that total federal spending had remained relatively constant since the latter part of 2010. When that spending is broken down into its components, it turns out that the recipe for 2012-13 appears to have been put in place a year early. Direct program spending in the 12 months up to November 2011 – the most recent month for which data are available – was $6-billion less than it had been in the preceding 12 months. (Transfers were up by $2-billion.)



Some of this reduction may simply be a winding down of the stimulus package. But it should also be remembered that much of the infrastructure program took the form of the transfer of funds to the provinces and local governments that actually carried out the projects.



It won’t really be much of a shock if the 2012-13 budget keeps total spending constant, increases transfers and cuts direct program spending. It will just be more of the same.



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