BMO Capital Markets Economics: Federal Budget 2011 Highlights

Mar 22, 2011 | Corporate Member News

Douglas Porter, Deputy Chief Economist

Michael Gregory, Senior Economist 

Ottawa’s budget deficit is projected at $29.6 billion for FY2011-12, in line with the forecast in the October 2010 Update ($29.8 billion). However, before any new budget measures, the shortfall would have been $27.8 billion, owing mostly to upgraded revenue growth. 

The $2.0 billion windfall provided room for new measures without throwing deficit reduction off track. There were $2.3 billion in new spending initiatives (a list that, coincidentally, mirrors many of the pre-budget wish list items of the opposition parties). These new outlays are netted against $0.4 billion in savings from closing tax loopholes and program reviews. 

The FY2010-11 shortfall was shaved to $40.5 billion from October’s $45.4 billion, again on better economic and revenue performance (and fully reflecting the windfall). 

Ottawa continues to project a return to budget surplus ($4.2 billion) by FY2015-16 ($1.6 billion larger than October’s projection). Indeed, the FY2014-15 balance is so close to zero (a $0.3 billion deficit), that it’s likely that the return to budget surplus will occur a year ahead of schedule. This reflects two factors. 

First, the budget projection incorporates a nominal GDP profile that is lower than the average private sector forecast (by about 0.6%), which results in around $1.5 billion in forgone revenue per year. Second, savings from the Strategic and Operating Review have not yet been reflected in the figures. Finance is estimating (or hoping) that this will generate $1 billion in savings in FY2012-13, rising to $4 billion by FY2014-15. 

While one must always be a bit sceptical about “savings to be named later”, the government does have a track record of indentifying and realizing cost savings in every budget since 2007 (these are currently running at about $1 billion and will amount to nearly $3 billion by 2014-15, and are already factored into the budget figures). 

Starting from FY2010-11, revenues are projected to grow at a 5.6% average annual rate over the next five years, a bit faster than nominal GDP growth, which is not out of line with historic norms. 

Expenses are expected to grow at only a 1.6% average annual rate, and even allowing for this year’s phase out of the fiscal stimulus package, program spending is still expected to grow at a lean 2.0% annual rate over the FY2011-12 to FY2015-16 interval. The latter is barely keeping pace with inflation, and with population growth estimated to average 0.8%, this represents a significant reduction in real spending per capita. This will require continued vigilance by the government in the future. 

With respect to Debt Management Strategy, two major changes were announced. First, the maturity dates of all bonds except for 10 years (June) and RRBs (December) will be altered. (Two-year bonds will now mature on Feb/May/Aug/Nov dates from Mar/Jun/Sep/Dec before, 3 years on Feb/Aug vs. Mar/Sep, 5 years on Mar/Sep vs. Jun/Dec, and 30 years on Dec vs. Jun.) The purpose is to spread out the massive coupon and principal flows that were occurring on the 1st of June and December each year. Second, in order to increase its prudential liquidity, the government will run with $25 billion extra cash balances by the end of three years, and next fiscal year, foreign exchange reserves will be lifted by US$10 billion (both these amounts are borrowed but will not add to net debt). 

Bottom Line: Budget 2011, as advertised by Finance Minister Flaherty, was all about keeping deficit reduction on track. If anything, despite succumbing to the temptation to spend the windfall provided in FY2011-12 by stronger economic and revenue growth, a budget surplus appears well on track by FY2015-16 if not a year sooner. 

Legal: 

The information, opinions, estimates, projections and other materials contained herein are provided as of the date hereof and are subject to change without notice. Some of the information, opinions, estimates, projections and other materials contained herein have been obtained from numerous sources and Bank of Montreal (“BMO”) and its affiliates make every effort to ensure that the contents thereof have been compiled or derived from sources believed to be reliable and to contain information and opinions which are accurate and complete. However, neither BMO nor its affiliates have independently verified or make any representation or warranty, express or implied, in respect thereof, take no responsibility for any errors and omissions which may be contained herein or accept any liability whatsoever for any loss arising from any use of or reliance on the information, opinions, estimates, projections and other materials contained herein whether relied upon by the recipient or user or any other third party (including, without limitation, any customer of the recipient or user). Information may be available to BMO and/or its affiliates that is not reflected herein. The information, opinions, estimates, projections and other materials contained herein are not to be construed as an offer to sell, a solicitation for or an offer to buy, any products or services referenced herein (including, without limitation, any commodities, securities or other financial instruments), nor shall such information, opinions, estimates, projections and other materials be considered as investment advice or as a recommendation to enter into any transaction. Additional information is available by contacting BMO or its relevant affiliate directly. BMO and/or its affiliates may make a market or deal as principal in the products (including, without limitation, any commodities, securities or other financial instruments) referenced herein. BMO, its affiliates, and/or their respective shareholders, directors, officers and/or employees may from time to time have long or short positions in any such products (including, without limitation, commodities, securities or other financial instruments). BMO Nesbitt Burns Inc. and/or BMO Capital Markets Corp., subsidiaries of BMO, may act as financial advisor and/or underwriter for certain of the corporations mentioned herein and may receive remuneration for same. “BMO Capital Markets” is a trade name used by the Bank of Montreal Investment Banking Group, which includes the wholesale/institutional arms of Bank of Montreal, BMO Nesbitt Burns Inc., BMO Nesbitt Burns Ltée/Ltd., BMO Capital Markets Corp. and Harris N.A., and BMO Capital Markets Limited.

TO U.S. RESIDENTS: BMO Capital Markets Corp. and/or BMO Nesbitt Burns Securities Ltd., affiliates of BMO NB, furnish this report to U.S. residents and accept responsibility for the contents herein, except to the extent that it refers to securities of Bank of Montreal. Any U.S. person wishing to effect transactions in any security discussed herein should do so through BMO Capital Markets Corp. and/or BMO Nesbitt Burns Securities Ltd.

TO U.K. RESIDENTS: The contents hereof are not directed at investors located in the U.K., other than persons described in Part VI of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001.

™ – “BMO (M-bar roundel symbol) Capital Markets” is a trade-mark of Bank of Montreal, used under licence. © Copyright Bank of Montreal

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