Prime Minister Mark Carney speaks during Question Period on Parliament Hill in Ottawa on Sept. 24.Adrian Wyld/The Canadian Press
Prime Minister Mark Carney delivered two surprises in his keynote address at a government-sponsored investment summit in Toronto on Sept. 15. The first was a hefty tax reform for capital spending costing tens of billions of dollars.
The second (made even more surprising by that first surprise) was that the operating budget would be balanced a year ahead of schedule.
There is no doubt that the tax reform that Mr. Carney unveiled last month is a big deal: Ottawa will allow for the immediate expensing of the entire cost of a wide range of investments, rather than more gradual expensing. The “productivity mega deduction” covers 65 per cent of asset types, up from the 15 per cent covered by a similar measure in last year’s budget. The Finance Department estimates a cost of $36-billion over five years, starting in the current fiscal year.
Yet, the operating budget will be balanced a year earlier than previously projected.
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To the casual observer – i.e. most Canadians – that might seem a titch contradictory. But it all makes sense if one accepts the Carney government’s rewriting of budget vocabulary, launched last year.
In the new lingo, there is an operating budget, devoted to day-to-day expenditures, and a capital budget, aimed at promoting investment. That split is not entirely devoid of logic or precedent: Other countries have split their budgets in this way. But the potential for abuse is obvious, as is made clear by the government’s decision to categorize this type of tax reform as capital spending, since it is aimed at spurring investment.
The Parliamentary Budget Officer, in a research report issued last week, noted that Ottawa’s definition of what constitutes capital spending and is therefore excluded from the operating budget is more expansive than other jurisdictions that use the same accounting framework.
In particular, the PBO wrote, “the inclusion of corporate income tax expenditures, investment tax credits and operating (production) subsidies blends policy measures with capital formation.” In other words, the government is pushing what would be rightly categorized as an operating expense by other countries into the capital ledger, decreasing the size of the operating deficit.
The PBO, in its typically understated way, says that some of the classifications of tax and spending measures “appear contradictory and would benefit from a more formal methodology motivation” and that “based on current public information, it is not possible to independently replicate the classification or anticipate how future spending might be attributed.” Translation: Ottawa’s methodology is a black box.
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So why does this matter? As a start, a budget is inherently a political document, a sales manual for the government’s economic agenda. Jiggling the figures until they are friendly to that agenda might be politically helpful for the Carney government, in that it obscures the true cost of Ottawa’s proposals. “Deficit soars as government cuts taxes” is not a particularly agreeable headline.
“Budget to be balanced a year earlier,” even if caveats were attached, is so much more pleasant, for the Liberals.
It is true, thankfully, that Ottawa continues to report the deficit in traditional terms. It’s worth recapping how big the gap is between the government’s preferred vocabulary of an operating deficit and that old fuddy-duddy method of actually including everything the government spends.
The spring economic update projected a $10.5-billion deficit for the day-to-day operating balance in the current fiscal year, improving to a $900-million surplus in fiscal 2028-29. But the traditional deficit figures are much higher: $65.3-billion in the current fiscal year, improving somewhat to $57.7-billion. (Those estimates date from April and do not encompass a host of developments, including the big change that Mr. Carney announced last month and a surge in oil prices.)
Notably, the gap between the two measures was projected to grow, from $54.8-billion this year to $58.6-billion.
The reality is that the Carney government has abandoned the fiscal constraints of its supposedly more spendthrift predecessor. The reality is that this government’s deficit is projected to decline only minimally through this decade.
The Liberals want federal finances to be viewed through a soft-focus lens. Canadians should take a step back and see the true picture.