The Government Budget
- Why Should I Care?
Politicians are taxing you, and spending your money. You might be interested to know how much, and where the money goes.
- This Lecture Has 6 Parts
- The Flow of Tax Money in Canada
- The Balanced Budget
- Federal Tax Revenue
- Federal Government Expenditures
- Equalization
- The Government Deficit and Debt
- What is the Government Budget?
Governments are a big player in our economy, as they impose taxes and spend billions of dollars to produce public services.
Governments need to keep an eye on their budget so that they don’t contract too much debt. The Government of Canada has a budget, a plan of the year’s expenditures and revenues. The budget is drafted by the Department of Finance, who is in charge of contracting debt if necessary. The budget must pass a vote at the House of Commons, in Parliament (James, 2011: 295).
The budget specifies expected spending, such as the military, embassies, justice system, health care, education, and other public services. The budget also determines the required level of taxation needed to raise sufficient funds to pay for all these services. Each government slates a budget in the spring, which establishes estimates of revenues it expects to receive in the next year. The government also establishes “credits” for each of its departments.
These credits tell civil servants how much they can spend in the year. At the end of the year, the government compares the actual revenues, with the actual spending. There may have been changes made during the year, or expectations may have been wrong.
Keep in mind that governments are under the Budget Constraint. This is to say that expenditures can be paid for, when revenues are insufficient, in only three ways:
- Increase Government Debt
- Increase Taxes
- Increase Money Supply (Inflation)
During war times especially, governments tend to finance their budget deficits with an increase in money supply (fiat currency). This is what Keynes meant when he said that “Inflation is a Tax in Disguise”. The government gets its funds to continue the war, but consumers will end up paying in the long run when prices increase.
- The Flow of Tax Money in Canada
Tax money in Canada is collected by many levels of government, but there is a redistribution mechanism that flows much of the money from the top, down the chain of commands. This is important to understand if you wish to understand where your tax money goes.
1 – THE FEDERAL GOVERNMENT
Most tax money is collected by the federal government, also called “Ottawa”. There are four main directions the money will take afterwards. We will show the exact figures later in this section.
First, Ottawa spends part of its money on its own needs, such as defence, justice, foreign affairs, and other federal jurisdictions, granted to it by the Constitution Act of 1982, following that of 1867. This also includes interest payments on past debt.
Second, Ottawa writes cheques to individuals, such as the Old Age Pension, child support, and transfers to disabled persons. Ottawa also provides half the money for Welfare payments, which are managed by the provinces.
Third, Ottawa writes cheques to the provinces and territories. These are called transfer payments, and cover infrastructure, health, justice, and education expenditures. They can be ear-marked for specific policy objectives, or not. There is an extra transfer for poor provinces called Equalization.
Fourth, Ottawa spends on what it calls “Status Indians”, who are Indigenous Persons listed on the Indian Registry. They are entitled to services delivered by the federal government directly, including education, housing, and general infrastructure such as roads, electricity and running water.
Health care is provided by provinces, who receive an extra transfer of money from Ottawa for this purpose. Ottawa also increases transfers to provinces for Status Indians living off reserve. Generally speaking, provinces do not provide services to Status Indians, if they live on “Indian Reserves”, since this is a federal obligation, under the Constitution. Indian reserves are run by the Ministry of Indigenous Affairs, and its local operative, the band council. These local bodies of governance receive most of their funds from Ottawa, but they can also generate their own revenue in the form of business activity. Indians living off-reserve receive health care and education services directly from their province.
2 – THE PROVINCES
Canadians also pay taxes, and a sizeable chunk, to their home province. Together with the federal transfers, this allows the province to cover its expenditures for the services they are allowed to provide, according to the Constitution. This includes transportation, education, health care, and its share of justice.
In Canada, dangerous criminals (2 years + sentence) are under federal care in penitentiaries. Less dangerous criminals (2 years minus 1 day) are under provincial care in prisons. Provinces also oversee lotteries, liquor stores, automobile license plates and insurance, energy supply, mining claims, forestry and logging rights, and the oversight of municipalities.
In terms of transfers, provinces write cheques to individuals, for example in the form welfare payments, but also to municipalities, who need money to build important infrastructure such as water treatment plants, transit systems, and the road network.
3 – THE MUNICIPALITIES
If they own a home, most Canadians pay municipal taxes to their local village, or city. Cities can also charge tariffs such as parking fares, so they are thus able to pay for snow removal, hockey rinks, libraries, parks, and community centers. However, without the transfers from their province, the city would not have enough money to run its yearly operations. For large projects such as building a water plant, or digging out a metro tunnel, municipalities need to ask money from both their province, and Ottawa.
4 – THE TERRITORIES
Very few Canadians live in a “territory”, such as Yukon, North West Territories, or Nunavut. These territories used to cover most of Canada’s land mass. Most of the territories were transferred to provinces towards the end of the 19th century. They had been converted into territories from their previous status of “Indian Land” or “Rupert’s Land” under the Royal Proclamation of 1763.
Since the 1982 Constitution, and subsequent agreements, including many land claims with namely the Inuit, the Gwich’in and the Tlicho nations, the territories have become much more autonomous. Where they used to be subject to direct management by Ottawa’s ministry of Northern Affairs, and a federally appointed Governor, they now can collect taxes and royalties, control land and resources, run municipalities, and resolve many local issues in their legislative assemblies. Ottawa still controls health and education.
5 – BAND COUNCILS
Under Canada’s Constitution, Indians living on reserves are managed by local Band Councils, which are mostly funded by federal funds. Many bands are active in earning business income, such as fisheries, mining agreements, tourism and casinos, and are less dependent on the federal purse. About a quarter of bands also collect taxes on reserve. Band councils are nonetheless directly managed by the federal government’s ministry of Indigenous Affairs (previously Aboriginal Affairs, or Indian Affairs).
Band councils usually manage about five to ten times more money per capita than Canadian municipalities. However, this money serves to provide a lot more services, which are not offered to them by the province. Band councils must provide education, justice, as well as local services such as snow removal, public libraries, infrastructure, and running water. Under this system, they usually get less services than Indians off-reserve who become tax-paying citizens and recipients of province-supplied services.
Let’s not forget that Indian reserves are usually small plots of land where “Indians” were rounded up as refugees on their own land. Most of the territory was turned to provinces which by design where devoted to providing farm land, forestry and mineral resources to settlers loyal to the British Crown. Almost all Canadian land was ceded by natives in the numbered treaties, so that the provinces could be expanded.
- The Balanced Budget
We can say the government has a balanced budget when the government’s expenditures are equal to tax revenues.
G = T : Balanced budget
When the government’s expenditures are inferior to tax revenues, the budget is in surplus. The government will have extra funds to set aside for the future, or to pay down its debt.
G < T : Budget surplus
When the government’s expenditures are superior to tax revenues, the budget is in deficit. The government will have to withdraw from its savings accounts, or contract debt, to pay for the over-spending.
G > T : Budget deficit
UPDATE DATA
The federal government has been running a budget deficit for the past few years. For the fiscal year 2016-2017, Ottawa’s revenues were 293.5 billion dollars. Unfortunately, the government spent 311.3 billion dollars. The result was a 17.8 billion dollar budget deficit.
Source : https://www.budget.gc.ca/2018/docs/plan/anx-02-en.html#3-Fiscal-Projections
Because of a growing population, but also an aging population, government is pressed to increase spending every year. Since the Great Recession of 2009, the budget deficits have constantly hovered around 20 billion per year. Prime Minister Justin Trudeau’s liberal government is predicting double-digit deficits until 2022.
To compare budget deficits across countries, or over time, economists use a share of the budgetary balance over the countries’ GDP figure. A one percent budget deficit is a lesser problem than a 15 percent deficit.
Table - Examples of budget positions (billions $)
|
Tax revenue |
Government expenditure |
Budgetary Balance |
Budgetary Position |
|
450,000 |
455,000 |
-5,000 |
Deficit |
|
375,000 |
365,000 |
10,000 |
Surplus |
|
398,000 |
398,000 |
0 |
Balanced |
|
401,000 |
429,000 |
-28,000 |
Deficit |
Source: IRPP, Policy Options
http://policyoptions.irpp.org/magazines/march-2017/how-to-speedread-the-federal-budget/
These deficits are meant to help the economy get back to potential output. In the case of Quebec, the government balanced its budget in 2015-2016.
- Federal Tax Revenue
There are three levels of government in Canada, and they all levy taxes. The federal government raised 293.5 billion dollars in 2016-2017. Most of that money comes from income tax (p. 278), but corporate taxes only make up 14.4 percent of total revenue. Other taxes include the famous GST, a 5 percent charge on retail consumption. It only represents 11.7 percent of all revenue.
Also note that taxes on imports (duties) are quite low and were not expected to rise at the time of drafting this budget (February 2018). However, since then, the US Trump administration has been increasing its duties on Canadian goods, such as steel and aluminum. The Trudeau government has answered with increases on other US goods imported to Canada. Duties may well be increasing in the next years.
|
Revenue streams |
2016-2017 |
Share of total |
Budgeted 2017-2018 |
Annual Variation |
|
Total income tax |
193.0 |
65.8% |
208.6 |
8.1% |
|
Personal income tax |
143.7 |
49.0% |
152.3 |
6.0% |
|
Corporate income tax |
42.2 |
14.4% |
48.2 |
14.2% |
|
Non-resident income tax |
7.1 |
2.4% |
8.2 |
15.5% |
|
Total excise taxes/duties |
51.3 |
17.5% |
53.7 |
4.7% |
|
Goods and Services Tax |
34.4 |
11.7% |
36.5 |
6.1% |
|
Customs import duties |
5.5 |
1.9% |
5.5 |
0.0% |
|
Other excise taxes/duties |
11.5 |
3.9% |
11.6 |
0.9% |
|
Employment Insurance premium revenues |
22.1 |
7.5% |
20.6 |
-6.8% |
|
Total other revenues |
27.1 |
9.2% |
26.8 |
-1.1% |
|
Crown corporations |
5.7 |
1.9% |
5.8 |
1.8% |
|
Other programs |
19.3 |
6.6% |
19.5 |
1.0% |
|
Net foreign exchange |
2.1 |
0.7% |
1.5 |
-28.6% |
|
Total budgetary revenues |
293.5 |
100.0% |
309.6 |
5.5% |
- Federal Government Expenditures
The federal government spent 287.2 billion dollars (B$) in 2016-2017 on programs for Canadians. The actual total is 311.3 B$ including the interest charges on the debt (p. 284).
|
Expenditure Accounts |
2016-2017 |
Share |
Budget 2017-2018 |
Annual Variation |
|
|
|
|
|
|
|
Major transfers to persons |
90.9 |
29.2% |
94.4 |
3.9% |
|
Elderly benefits |
48.2 |
15.5% |
50.9 |
5.6% |
|
Employment Insurance |
20.7 |
6.6% |
20.1 |
-2.9% |
|
Children’s benefits |
22.1 |
7.1% |
23.4 |
5.9% |
|
|
|
|
|
|
|
Major transfers to other levels of government |
68.7 |
22.1% |
70.5 |
2.6% |
|
Canada Health Transfer |
36.1 |
11.6% |
37.1 |
2.8% |
|
Canada Social Transfer |
13.3 |
4.3% |
13.7 |
3.0% |
|
Equalization |
17.9 |
5.8% |
18.3 |
2.2% |
|
Territorial Formula Financing |
3.6 |
1.2% |
3.7 |
2.8% |
|
Gas Tax Fund |
2.1 |
0.7% |
2.1 |
0.0% |
|
Home care and mental health |
0.0 |
0.0% |
0.3 |
299.9% |
|
Other fiscal arrangements |
-4.3 |
-1.4% |
-4.7 |
9.3% |
|
|
|
|
|
|
|
Direct program expenses |
127.6 |
41.0% |
139.7 |
9.5% |
|
Transfer payments |
41.6 |
13.4% |
44.1 |
6.0% |
|
Operating expenses |
86.0 |
27.6% |
95.6 |
11.2% |
|
|
|
|
|
|
|
Total program expenses |
287.2 |
92.3% |
304.6 |
6.1% |
|
Public debt charges |
24.1 |
7.7% |
24.4 |
1.2% |
|
Total expenses |
311.3 |
100.0% |
329.0 |
5.7% |
About one-third of the money is spent on running and operating the functions of the federal government such as the military, justice, environment, and foreign affairs (including welfare cheques, Ottawa’s share is half of the program, provinces pay the rest).
A third (29 %) of the money is directly transferred to people, such as elderly, children’s parents, or unemployed. An extra set of transfers are sent to provinces, but made through several departments in Ottawa. These transfers are included in the operating expenses.
A fifth (22 %) was directly transferred to provinces. This allows them to help pay for hospitals, schools, roads and welfare.
Interest payments on federal debt represent 7.7 % of the budget.
Together these last three functions represent more than half (58 %) of Ottawa’s budget. If we include Ottawa’s transfer payments in the first category (34.9 Billion), we end up with 72 %. More than two-thirds of the money collected by Ottawa is used to cut cheques to people, the provinces, or lenders.
- Equalization
As Canada is a federation, most of the public services are supplied by the provinces, which hold some level of autonomy. This “sharing of powers” is protected in Canada’s Constitution. However, Canada’s first constitution (1867) gave Ottawa the sole role of collecting taxes. Quebec was the first province in Canada to implement its own income tax regime, under the Duplessis post-WWII government. Other provinces have followed suit since, but Ottawa still collects most of the taxes in the country.
To be able to provide the services which are under its responsibility, the Quebec government receives transfers from Ottawa, as well as collecting its own revenues. To ensure that services across the country are of equal quality, the federal government runs an equalization program which takes money from the richest people of the country, who mostly live in Ontario, Alberta, Newfoundland, British Columbia and Saskatchewan. These people pay lots of taxes to their provincial governments. The extra money in Ottawa is then transferred to poorer provinces such as PEI, Nova Scotia, New Brunswick, Manitoba, and Quebec.
Quebec gets the largest cheque (10 billion dollars in 2016), which counts for more than half of the money in the program. But when you factor in the size of the population, Quebec gets about half of the PEI and New Brunswick transfers. This is because Quebec is poor enough to get an equalization cheque, but not as poor as the Maritime provinces.
Equalization is a contentious issue in Quebec politics. Federalists argue that Quebec would have a hard time managing without the transfer. Sovereigntists argue the program is an unproductive largesse which is keeping Quebec in a state of dependency towards the rest of Canada.
Equalization Transfers, 2016-2017
|
Province |
Equalization Transfer 2016 |
Population 2016 |
Equalization |
|
New Brunswick |
$1,708,000,000 |
757,384 |
$2,255 |
|
PEI |
$380,000,000 |
149,472 |
$2,542 |
|
Nova Scotia |
$1,722,000,000 |
948,618 |
$1,815 |
|
Manitoba |
$1,736,000,000 |
1,318,115 |
$1,317 |
|
Quebec |
$10,030,000,000 |
8,321,888 |
$1,205 |
|
Ontario |
$2,304,000,000 |
13,976,320 |
$165 |
|
|
|
|
|
|
Total / Average |
$17,900,000,000 |
25,471,797 |
$703 |
Sources: http://www.fin.gc.ca/fedprov/eqp-eng.asp and https://www150.statcan.gc.ca/t1/tbl1/en/cv.action
(Calculations by author)
Also note that Ontario used to be a “rich” province, due to historical oil reserves, and an important auto sector. The auto industry was hard hit during the recession and Ontario has become “have not” province for the first time. But as we can see, the per capita payout is not very large. Many observers believe Ontario will go back to “rich” province status shortly. There is also a scheme for the Territories called Territorial Formula Financing.
- The Quebec Budget
After an important spending freeze in 2013, 2014, and 2015, the Quebec budget has been balanced since 2015, thanks to increases in revenue. This is mostly due to the betterment of the economy and increases in tax revenue.
For 2016-2017, Premier Philippe Couillard’s liberal government has had a budget surplus. On total revenue of 102.9 billion dollars (B$), the government has spent 98.5 B$, including interest charges on the provincial debt. This 4.4 B$ surplus was set aside in two savings accounts: the Generations Fund (2 B$), and the Stabilization reserve (2.4 B$).
|
Revenue streams |
2016-2017 (M$) |
Share of total |
Budgeted 2017-2018 |
Annual Variation |
|
Total income tax |
44,849 |
43.6% |
45,306 |
1.0% |
|
Personal income tax |
29,231 |
28.4% |
29,115 |
-0.4% |
|
Health Contribution |
5,969 |
5.8% |
6,049 |
1.3% |
|
Corporate income tax |
7,480 |
7.3% |
7,900 |
5.6% |
|
School Property Tax |
2,169 |
2.1% |
2,242 |
3.4% |
|
Total excise taxes/duties |
22,589 |
22.0% |
24,246 |
7.3% |
|
Consumption taxes (incl. QST) |
19,292 |
18.7% |
20,299 |
5.2% |
|
Duties and Permits |
3,297 |
3.2% |
3,947 |
19.7% |
|
Total other revenues |
15,290 |
14.9% |
14,975 |
-2.1% |
|
Government Enterprises |
4,899 |
4.8% |
4,735 |
-3.3% |
|
Miscellaneous |
10,391 |
10.1% |
10,240 |
-1.5% |
|
Total Federal Transfers |
20,179 |
19.6% |
22,669 |
12.3% |
|
Equalization |
10,030 |
9.7% |
11,081 |
10.5% |
|
Health Transfer |
5,946 |
5.8% |
6,211 |
4.5% |
|
Education and Social Transfer |
1,635 |
1.6% |
1,701 |
4.0% |
|
Other Programs |
2,568 |
2.5% |
3,676 |
43.1% |
|
|
||||
|
Total budgetary revenues |
102,907 |
100.0% |
107,196 |
4.2% |
Total revenue stood at 102.9 B$, almost half of which is collected in the form of income taxes. Other taxes represent a quarter (22 percent) of the total, and include the QST, and excise taxes on fuel, cigarettes and alcohol.
Other revenues collected by Quebec City include Government Enterprises, such as Hydro-Quebec, Loto-Quebec, the Société des alcools du Québec, Investissement Québec, and the Société de l’assurance automobile du Québec.
Federal Transfers make up one-fifth of the province’s revenue (19.6%), which include Equalization, and the Health and Education transfers.
Quebec’s expenditures rang up at 98.5 B$, including interest charges on the provincial debt.
|
Quebec Government Expenditures |
2017-2018 (M$) |
Share |
Budget 2016-2017 |
Annual Variation |
|
Health and Social Services |
40,240 |
39% |
38,737 |
-3,7% |
|
Education and Culture |
22,572 |
22% |
21,646 |
-4,1% |
|
Economy and Environment |
13,833 |
13% |
12,338 |
-10,8% |
|
Support for Individuals and Families |
10,113 |
10% |
9,585 |
-5,2% |
|
Administration and Justice |
8,059 |
8% |
6,712 |
-16,7% |
|
Debt Charges |
9,237 |
9% |
9,527 |
3,1% |
|
Total |
104,054 |
100% |
98,545 |
-5,3% |
More than a third (39 percent) of the money went to Health, which mostly covers the wages of doctors, nurses and civil servants who run the hospitals, clinics and other health care institutions in the province.
A quarter of the sums (22 percent) went to Education, which includes primary, secondary, Cégep, and university institutions.
The rest of the money is spent on the other “missions” of the provincial government (21 percent) such as economic development, environment, transit and transportation infrastructure, support for people (welfare cheques, etc.), and the justice system (police, courthouses, and prisons).
The final accounting line is devoted to interest payments on the public debt (9 percent).
- Government Deficit and Debt
Government’s go into debt when their budget is in deficit. Repeated deficits will grow the debt. Government debt is equal to the accumulated deficits. Governments usually prefer to run a surplus before they start paying down debt. Every year though, they must pay the interest charges.
The federal debt clocked in at 631.9 B$ at the end of the 2016-2017 fiscal year (March 31, 2017). That’s about one-third of the country’s annual GDP.
If you take a step back, the federal debt has been shrinking since 1994, under the orders of Paul Martin, Finance Minister of the Liberal Party of Canada government. At the time, Canada was on the brink of bankruptcy and threats of taking over the country’s affairs were made by the International Monetary Fund.
In 2010, Prime Minister Stephen Harper’s conservative government announced a 50-billion-dollar budget deficit that would grow the debt even faster than usual. In 2018, Prime Minister Justin Trudeau’s liberal government is expecting to increase the debt by 20 B$ per year until 2022.
Provinces can also issue debt in their name. These financial papers are called Treasury bonds. Quebec’s debt is the second highest in Canada, clocking in at 181.8 B$ in 2016-2017. This also represents about a third of Quebec’s GDP. Ontario’s debt was 301.9 B$.
- Wrap-Up
The Government Budget has an impact on the economy. When the budget is in deficit, tax revenues are insufficient to cover expenditures. A budget surplus means tax revenues are superior to expenditures.
The Canadian government runs an equalization program which takes money from the rich provinces and gives it to the poor. Quebec gets half of this: 7 billion dollars.
- Cheat Sheet with Memory Helper
Balanced budget: When government expenditures are equal to tax revenues.
Budget surplus: When government expenditures are inferior to tax revenues.
Budget deficit: When government expenditures are superior to tax revenues.
Government debt: Accumulated deficits.
Equalization: Redistribution program to poor provinces.
- References and Further Reading
Colander, D. C., Rockerbie, D. W., & Richter, C. (2006). Macroeconomics, Third Canadian Edition. McGraw-Hill Ryerson.
Department of Finance. (2012). Budget Plan. Government of Canada. Retrieved May 29, 2015 from: http://www.budget.gc.ca/2013/doc/plan/budget2013-eng.pdf#page=44
James, E., Wellman, S. J. & Aberra, W. (2010) Macroeconomics, 2nd ed. Pearson Canada. Chapter 7.
MacMahon, T. (2011). WTF: The federal budget and 50 years of Canadian debt. The National Post. Retrieved from http://news.nationalpost.com/2011/03/21/graphic-50-years-of-canadian-debt/
Québec: Ministère des finances. (2015). Budget Plan. Retrieved May 29, 2015 from: http://www.budget.finances.gouv.qc.ca/budget/2014-2015a/en/documents/BudgetPlan.pdf
Sabin, J. (2017). A Federation within a Federation? Devolution and Indigenous Government in the Northwest Territories. IRPP Study. N. 66, November 2017. Retrieved March 22, 2018, from: http://irpp.org/wp-content/uploads/2017/11/study-no66.pdf