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OTTAWA—The Alternative Federal Budget (AFB) Economic and Fiscal Update, released today by the Canadian Centre for Policy Alternatives, projects that the federal government will have budget surpluses of $4.2 billion in 2006-07 and $4.0 billion in 2007-08.
The report, by CCPA Senior Economist Ellen Russell and CCPA Research Associate Mathieu Dufour, finds that the days of large windfall surpluses are over. The spending and tax cut choices that the Conservative government made in its first budget will make double-digit budget surpluses impossible in upcoming years.
However, projected budget surpluses in the $4 billion range are larger than the scant $600 million surplus in 2006/07 and $1.4 billion surplus in 2007/08 that were projected in the May 2006 Federal Budget.
But these projected surpluses could be endangered if macroeconomic conditions worsen, particularly if U.S. economic conditions deteriorate more gravely than is currently expected, the report warns. In addition, the report points out that the government’s decision to eliminate its contingency reserve means there is no longer an extra cushion in the event an economic downturn.
The government will use up these projected budget surpluses if it delivers on its promises to fix the fiscal imbalance, cut capital gains taxes, and make an additional percentage point cut in the GST.
“The Conservatives are running out of cash for their existing promises,” explains Russell. “An additional percentage point cut in the GST alone would more than exhaust the budget surplus if it was implemented before 2009-2010.”
Under these circumstances, the Conservative government does not have sufficient funds to promise new tax cuts. Any expensive new tax cut promises would likely oblige the government to make a severe reduction in program spending in the future.
“Any new tax cut or spending promises will have to be financed by spending cuts or other means, such as the privatization of Crown corporations,” says Dufour.
The CCPA, which has an extremely accurate record of forecasting budget surpluses, is one of the independent fiscal forecasters selected to brief the House of Commons Finance Committee tomorrow before Finance Minister Flaherty delivers his fiscal update.
