The 1998 Alternative Federal Budget - Appendix


Introduction

What Happened?

What Could Have Happened?

What Might Happen Now?

Conclusion

Appendix

Canadian Centre for Policy Alternatives

CHO!CES: A Social Justice Coalition

by Jim StanfordEconomist, Canadian Auto Workers and Co-Chair, Macro Policy Committee, Alternative Federal Budget

Suite 804, 251 Laurier West, Ottawa, Ontario, K1P 5J6

Phone (613) 563-1341; fax (613) 233-1458; e-mail ccpa@policyalternatives.ca.


The 1998 Alternative Federal Budget: Technical Paper #1

OVER THE RAINBOW: The Balanced Budget, How We Got It, And How to Hang Onto It

Appendix

The overall improvement in the federal deficit can be decomposed into three components:

The total change in the deficit (D) equals the decline in program spending (P) plus the increase in tax revenues (T) plus the decline in debt servicing charges (DS). These latter two components can be further decomposed as follows:

The growth in taxes equals the tax-to-GDP ratio in 1997 (t97) times GDP in 1997 (GDP97), less the corresponding sum for 1995. Similarly, the reduction in debt service charges equals the government’s average effective interest rate in 1995 (i97) times the outstanding stock of federal debt at that time (B95), less the corresponding sum for 1997. The average effective interest rate is defined simply as the ratio of federal debt service charges during the period to the stock of debt outstanding at that time. Disaggregating and rearranging terms, we obtain:

The five terms on the right-hand side of the equation can be interpreted consecutively as follows:

  1. reduction in program spending;
  2. "bracket creep" and other tax increases—which have increased the share of federal tax revenues in overall GDP;
  3. increased tax revenues resulting from GDP growth;
  4. savings resulting from lower interest rates; and
  5. higher debt service charges resulting from continued growth in the debt burden.

The first four terms all contributed toward the reduction of the deficit; the last term offset some of this improvement.

A similar set of calculations to those presented in Table 1 can be performed using the federal government’s official Public Accounts data (instead of the National Accounts data utilized above). This approach yields somewhat different results, due to definitional differences, and the greater seasonality of the Public Accounts data series. The analysis presented in Table 1 is repeated below, using Public Accounts data for the same time period (from the second quarter of 1995, immediately following Martin’s historic budget speech, to the second quarter of 1997). The same general conclusion is generated: a more favourable macroeconomic climate has been considerably more important to the overall deficit-reduction effort than has the reduction in program spending (which accounted for just 30% of total deficit reduction in the Public Accounts analysis). New revenues resulting from "bracket creep" appear to be more important in the Public Accounts analysis, accounting for over one-third of total deficit reduction (versus just 10% in the National Accounts analysis). This result, in particular, must be interpreted cautiously because of strong seasonal patterns in the revenue streams reported in the Public Accounts data.

Appendix Table

Decomposition of Federal Deficit Reduction: Public Accounts

2ndQuarter 1995 to 2ndQuarter 1997

April-June 1995

April-June 1997

Nominal GDP ($billion)

$773.8

$828.0

Total Federal Revenue ($billion)1

$113.6

$134.3

"Tax Ratio" (% of GDP)

14.7%

16.2%

Program Spending ($billion)1

$103.4

$92.9

Debt Service Payments ($billion)1

$46.8

$43.5

Deficit ($billion)1

$36.6

$2.1

Opening Debt ($billion)2

$545.7

$593.3

Effective average interest rate (%)

8.58%

7.34%

Sources of Deficit Savings:

Billion Dollars1

Percent of Total

Improved Macroeconomic Environment

GDP Growth

Lower Interest Rates

TOTAL

$8.0

$7.4

$15.3

23.1%

21.4%

44.5%

Reduced Program Spending

$10.5

30.5%

Tax Increases

$12.7

36.9%

Increased Debt Burden

-$4.1

-11.9%

TOTAL

$34.4

100.0%

SOURCE: The Fiscal Monitor, Department of Finance, Table 1. 1. At annual rates.

2. Closing debt at March 31 each year, reported in federal Budget PlanEconomic and Fiscal Update.

Finally, it should be noted that the total benefits of improved macroeconomic conditions for the federal budget probably exceed the value of the third and fourth components listed above (GDP growth and lower interest rates, respectively). Since federal program spending still varies counter-cyclically with the state of the macroeconomy (through mechanisms such as unemployment insurance payouts), the improved state of Canada’s economy over the past two years may have contributed to the achieved reduction in program spending. In contrast, the preceding analysis has assumed conservatively that all of the program spending savings resulted from the pro-active fiscal restraint of the government. The fact that actual 1996-97 federal program spending was more than $4 billion less than Martin’s original budget may reflect this additional positive fiscal consequence of stronger economic conditions. Thus the program cutbacks probably account for less than the 45% share of budget savings that was reported in Table 1, while improved macroeconomic conditions account for more than the 59% estimated share reported in Table 1.

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