NORTHERN ECONOMIST

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4 Posts with tag "revenues"

Deficit Forecasting

Ontario's provincial parties have released their platforms and budget costing and fiscal forecasting is part of the package at least for the Conservatives and the Liberals.  The NDP do not yet have a detailed projection of what they might anticipate revenues and expenditures to be like if they form the government though I'm not sure they will be providing one given their platform stresses that their fiscal competence should be measured by the fact that across Canada, New Democratic governments have been the least likely to run deficits.  It is an odd argument, requiring one to accept that they will be fiscally responsible on faith alone. 

 

As for the Liberal and Conservative plans, the accompanying figures are from the Liberal Platform costing document and the Changebook Backgrounder and they show remarkably similar trajectories for revenues and expenditures that will balance the Ontario budget by 2017.  A difference is that Liberal revenues and expenditures are generally both a bit higher than the Conservative projections.  This could be due to the so-called "hole" that the Liberals have referred the Conservatives as having in their projections but it could also be the result of a more optimistic view of future revenues and spending on the part of the governing Liberals.  In the end, they both seem to get to the same place but the Liberals spend and tax a bit more to get there.  Its not really a big difference and both forecasts will be quite sensitive to what happens to economic growth over the next decade.  Another severe recession should be enough to put both sets of forecasts out of kilter.

 

 

 

 

Looking for the "Taxman"

Well, we are just a few days from the official start of the Ontario provincial election campaign but the simmering summer pot of campaigning is starting to bubble over.  The last few days have seen Progressive Conservative Leader Tim Hudak refer to Dalton McGuinty as "The Taxman" on a number of occasions.  Has the McGuinty government raised the tax burden on Ontario?  I've decided to use data from the Federal Fiscal Reference Tables to shed some light on this.

Well, rather than taxes, the term "own-source revenue" is probably a better description because the provincial government raises revenue not just from income and sales taxes but also from assorted fees, gambling revenues, liquor sales and natural resource rents.  These all represent a transfer from the private to the public sector. 

I have down below two graphs. On the left is real per capita own source provincial government revenue (in 1997 dollars) from the mid-1980s to the present.  This has risen from 3,261 dollars per person in Ontario in 1986/87 to 4,116 dollars in 2009/10.  It is of course subject to ebbs and flows as a result of business cycle fluctuations and has dropped substantially over the last couple of years due to the recession.  However, it peaked in 2007-08 at 5,052 dollars. Overall, it has trended upward over  a time span that includes the governments of David Peterson, Bob Rae, Mike Harris, Ernie Eves and Dalton McGuinty.  All of these premiers saw years with substantial increases in per capita own source revenues but also some years with declines. 

A better measure is on the right - the ratio of own source revenue to GDP.  In a sense it represents the burden of revenue raising on the economy as a whole and probably better reflects business cycle fluctuations as both GDP and revenues move in conjunction with the business cycle.  Here, the trend is also upward over time.  Whereas the ratio is 0.105 (10.5 percent of GDP)in 1986/87, by 2009/10 it has climbed to 0.127 (12.7 percent).  This ratio also peaks in 2007-08 at 14.8 percent.  What is interesting is that the average value of this ratio was 11.7 percent under David Peterson, 12.1 percent under Bob Rae, 12.9 percent during the Harris-Eves era and 13.6 percent during the McGuinty era.  The trend has been upward over the last twenty years no matter who has been in power.  Dalton McGuinty has indeed presided over an era where the provincial own source revenue to GDP ratio has reached its greatest highest but he has been able to do so by standing on the shoulders of his predecessors.  They have all been taxmen.

 

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Canada's Changing Federation

It is quite remarkable how over the last half century, Canada's provinces have grown in fiscal power to the point where they are now the dominant fiscal tier in the Canadian federation.  Nowhere is this more evident than when looking at the ability to raise tax revenues.  In 1961, the total tax revenue taken in by the provincial local sector – excluding federal transfers, investment income and sales of goods and services – was 3.8 billion dollars as opposed to 6.1 billion by the federal government.  By 2009, the provincial local sector was raking in 243.5 billion dollars in tax revenue and the federal government 196.8 billion dollars.  This represents a remarkable shift in the Canadian federal balance.  The change in fortunes is even more starkly highlighted when tax revenues are compared to GDP.  The federal tax revenue to GDP ratio fell from 14.7 percent in 1961 to reach 12.9 percent in 2009 while the equivalent ratio for the provincial local sector rose from 8.6 percent to 18.3 percent.  As the accompanying figure shows, the federal tax revenue to GDP ratio has stayed remarkably stable since 1961.  That of the provincial local sector on the other hand grew dramatically between 1960 and 1990 though it declined slightly in recent years.  Keep in mind that these are just tax revenues and do not include investment income, income from the sale of goods and services and transfers from other levels of government. 

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Is Federal Spending Sustainable?

As budget season approaches, a quick survey of Canada’s long-term federal finances is definitely in order.  Figure 1 below plots federal government revenues and total expenditures for the entire period 1961 to 2009 using data from the 2010 Fiscal Reference Tables.  While the period from 1961 to the mid-1970s was largely balanced budgets, the impact of the post-1973 oil price shock, productivity decline, stagflation and high interest rates is demonstrated in the widening deficit gap which is not closed until the restrictive fiscal policies of the mid 1990s.  The new era of budget surpluses lasts until 2008-9 when there is a 5.8 billion dollar deficit followed by 55.6 billion the year after.

Figure 1

 

As we move towards the March 22nd budget date, the question is whether federal spending is sustainable – that is does the increase in the resource base match the increase in spending?  Figure 2 presents the average annual growth rates for federal revenues as well as program spending, debt charges and total spending.  The results suggest that federal spending has been largely unsustainable for much of the last 50 years unless there is a concerted effort to rein it in as during the fiscal restraint of the 1990s.  For the overall period from 1961 to 2009, revenues have grown at an average annual rate of 7.8 per cent compared to 8.3 percent for program spending and 8.3 percent for debt charges.  For the period 1961 to 1990, program spending was sustainable given that it grew at an average annual rate of 10.3 per cent as opposed to 10.8 percent for revenues.  However, total spending was unsustainable because of debt charges, which were growing at 15 per cent.  The 1990s, because of fiscal restraint, was a sustainable period as revenues grew faster than program spending and debt charges.  However, old patterns re-asserted themselves after 2000 as revenue growth has failed to keep pace with program spending.  The situation has only not been worse because of historically low interest rates, which have served to reduce debt service costs.  For another perspective on the federal fiscal situation focusing on expenditure and revenue composition, you might want to check out Stephen Gordon’s latest piece at Worthwhile Canadian Initiative.

Figure 2