The 1998 Alternative Federal Budget - 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
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OVER THE RAINBOW: The Balanced Budget, How We Got It, And How to Hang Onto It
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 governments 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:
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 governments 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 Martins 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.
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 Canadas 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 Martins 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.