OTTAWA — The Liberal government could enjoy billions of dollars worth of extra breathing room in its pre-election budget next year, as rising interest rates dramatically reduce some of Ottawa’s key personnel expenses, a new report says.
Parliamentary Budget Officer Jean-Denis Frechette will release a study Tuesday that finds government expenses tied to pensions and disability benefits could fall as much as $8 billion per year by 2023 — leaving the Liberals with an opportunity to forecast substantially smaller deficits just ahead of the 2019 election.
The extra fiscal room is the result of an accounting practice that links the perceived future value of pension and disability liabilities to interest rates. As interest rates rise, the future amount owing on those liabilities effectively declines, in turn lowering the amount of money governments need to set aside every year to cover the expense.
The PBO report digs into Ottawa’s roughly $130-billion pool for direct program spending — a long-under monitored and notoriously opaque section of the public purse. Roughly $50 billion of direct program spending goes toward government personnel, either in the form of wages, employment insurance contributions, pension contributions or health and dental coverage.
Over the past 10 years, the report found, expenses tied to pension contributions and disability benefits have ballooned from $2 billion per year to roughly $10 billion. Now, with interest rates expected to rise, those expenses could fall sharply in the next five years, down to around their previous levels.
The fiscal boost comes just as Finance Minister Bill Morneau faces criticism that Ottawa has not placed enough emphasis on balancing its books, instead driving up its fiscal stimulus measures and piling money into research and development programs.
The Liberals’ 2018-19 budget ran a $18.1-billion deficit, including a $3-billion adjustment for risk. That will fall to $17.5 billion in 2019-20.
Opposition Members of Parliament, and some economists, have criticized the document for containing no roadmap back to a balanced budget, as prime minister Trudeau had promised during his campaign.
Most economists and bank analysts expect the Bank of Canada to continue hiking its key interest rate this year, after the Canadian economy outpaced growth expectations early in 2017, growing three per cent over the year.
The BoC has hiked its overnight interest rates three times since July 2017, up to 1.25 per cent.
However, the bank has struck a decidedly more cautious tone in recent weeks amid concerns that negotiations around the North American Free Trade Agreement could implode, crimping business investment. On March 7 the bank held its overnight rate, citing trade uncertainty.
While rising interest rates also cause the cost of government debt to rise, most of those debts are fixed into decades-long time horizons, and so are less exposed to interest rate fluctuations.
The budgetary tailwind enjoyed by the Liberal Party is in contrast to the headwinds faced by former prime minister Stephen Harper, who cut roughly $4.9 billion from direct program spending in its 2015-16 budget. Those cuts failed to materialize on the government books, due to plummeting interest rates that in turn raised the cost of pensions and disability benefits.
Ottawa owes roughly $300 billion in pension and disability liabilities, spread out over many years. For future disability benefits alone, Ottawa owes a total of roughly $130 billion, up from $57 billion in 2005-06.
MPs have called for more transparency in direct program spending, arguing that the pool is often used to cover spending miscalculations in other sections of the budget. The PBO report marks its first such study of those program expenses.
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