Yesterday’s federal economic and fiscal update has been lauded as showing an economy doing much better than expected as well as improved federal finances relative to the spring 2021 budget. In the end, the recovery from the depths of the pandemic has been much better than was anticipated and this has resulted in federal government revenues much greater than was forecast last spring. Figure 1 shows that revenue is expected to be billions of dollars higher in each fiscal year up to 2025-26. – as much as 20 billion dollars more in some of the years. Indeed, over the six years from 2020-21 to 2025-26, total additional revenues are expected to total about $106 billion.
However, as Figure 2 illustrates, that is being accompanied by a parallel process on the federal expenditure side. Aside from 2020-21 which has turned out to have about $6 billion less spending than expected, the other years will see higher additional expenditures than originally forecast ranging from $7 billion to $15 billion. Over the entire six-year period, the federal government will be spending an additional $54 billion than was laid out in the spring budget. So, about half of the new revenues are going into additional spending while the other half enables the government to have a smaller deficit than planned in each of the years ahead.
Whereas the spring 2021 budget saw a deficit (including actuarial losses) in 2021-22 of $154.7 billion, it is now forecast to be $144.5 billion. By 2025-26, the deficit (including actuarial losses) is now expected at $13.1 billion whereas before it was going to be $30.7 billion. Naturally, smaller deficits down the road will result in a smaller net debt and smaller net debt to GDP ratios given the projected GDP growth. So rather than a net debt of $1.529 trillion by 2025-26, it should only be $1.359 billion. The world should last so long.
Two things have been left unsaid about the updated numbers. First, when all is said and done and the COVID-19 spending bubble wound up circa 2022-23, spending will be about 22 percent higher than it was in 2019-20. Put another way, COVID-19 aside, federal spending will have grown at just over 7 percent a year. The pandemic in classic Peacock-Wiseman fashion has provided an opportunity for the federal government to expand its spending and there has been an upward shift or displacement that is going to remain permanent.
Second and more disturbing is if one accepts the average federal government inflation forecast over the next five years of 2.6 percent and adds in population growth of just over 1 percent annually, then the average nominal GDP growth of 4 percent from 2022 to 2026 is eaten up by inflation and population growth such that real per capita GDP after the post COVID rebound is essentially going to be flat after 2022. If inflation turns out to be higher at say in the 4 to 5 percent range, then we are looking at a decline in real per capita GDP over the same period. There is not going to be any real growth. That is the disturbing aspect of this update. There is going to be a permanent enrichment of federal spending but not in the actual real economic growth of the economy.