Yes, they could have been better, or at least I think so. Then again it is almost impossible for an economist to look at a government fiscal plan and think that (in the words of the Lego Song) ‘everything is awesome’. That aside, this past week’s Federal and Ontario Budgets were testaments to decent planning, decent economic conditions and a little bit of luck to boot.
The big picture is that big deficits are done, more or less. In the case of the federal government, balanced books are a priority and a surplus – a small one, but a surplus nevertheless – is projected for 2015/16. It is going to take longer for Ontario to get in the black, but the province expects to do that by 2017/18. Not awesome, but certainly better than the widening deficits of the past couple of years.
Whether all is right policy-wise really depends on where you see the economy going. Right now, the price of oil is cutting into federal revenues, and from the provincial side of things there is a real concern that the U.S. expansion could falter. Given that, there is an argument to be made for a little more stimulus all around, particularly in the form of tax cuts. Still, it is easy enough to inject a bit more stimulus later on if it proves to be needed.
What I did love about both budgets is the fact that debt service costs are on the decline. At the Federal level, that means in 2015/16 a little less than 9 percent of expenses will be used for debt service – which may not sound impressive until you realize it was about 30 percent in the mid-1990s and about 16 percent a decade ago. As well as some concentrated efforts to pay down debt, governments have also been aided by the phenomenal bond market rally that has driven financing costs to bargain basement levels. With world central banks on hold when it comes to rate hikes, that nice break in financing costs will continue.
So what is not awesome? Well, despite the improvement to the bottom line, Ontario could face a cut to its debt rating from either Standard and Poor’s or Moody’s (or both) each of which have a negative outlook on the province. They want to see Ontario do better than its fiscal targets, and while that is currently happening, the next couple of years are still a risk.
While the Federal government is in a better position, hitting longer term surplus goals will really depend on the bigger picture for the economy. For now things look stable (and the forecast projections within the budget are prudent) but a U.S. or global economic slowing is a risk, as is a further drop in oil prices.
There was little financial market reaction to either budget this past week, which is a good thing: it shows that global markets pretty much trust that our governments are on track. Fingers crossed that we do not get buffeted by forces beyond our control and that the back-in-the-black trends continues on.