The big cut Jim Flaherty won’t have to make: Budget 2013’s spending mystery explained

Perhaps the biggest unanswered question about the budget Finance Minister Jim Flaherty tabled last week was how he planned to cut a whopping $4 billion out of the government’s operating expenses in the coming year. As it turns out, though, that might just be the easiest part of Flaherty’s budget-balancing task ahead.

The planned cut in question falls under the heading “direct program expenses,” which means it’s a saving that must be found in what Ottawa spends directly, not what it transfers to people and provinces. After posting $80.5 billion in operating expenses in 2012-13, Flaherty’s new budget allows for just $76.5 billion in 2013-14. And “Economic Action Plan 2013,” as he likes to call the budget, offers scant detail on what is to be slashed to achieve this $4-billion reduction, which led one columnist to say the budget plan shows operating costs “magically dropping” and another reporter to call the cut “something of a mystery.”

I was mystified, too. But my curiosity was not so much about how the government intended to make the deep cut called for in 2013-14. I was more perplexed by how it ever managed to spend $80.5 billion on operations in 2012-13. After all, Ottawa’s annual operating expenses have been running three or four billion below that level in recent years. In his 2012 budget, Flaherty had projected 2012-13 operating expenses of $76.8 billion. In other words, the numbers in last week’s fiscal blueprint appeared to show, not only that the government was setting out to cut deeply in 2013-14, but that this was coming after it badly overshot its 2012-13 operating spending target.

As is so often the case, however, those raw numbers don’t tell the tale. I asked the finance department for an explanation. They gave me one today by email. In fact, the lion’s share of that surprising increase in 2012-13 operating spending comes from just two items that won’t have to be repeated.

Firstly, Flaherty booked $2.4 billion to reflect an unanticipated rise in the federal liability for decommissioning and waste management at Atomic Energy of Canada Ltd. Secondly, he tallied a $1.1 billion cost after the government lost a court decision, which it decided not to appeal, that compeled an increase in disability benefits for military veterans. “Once these two revisions are accounted for,” the finance department said in an email, “the change in projected operating expenses between 2012-13 and 2013-14 is largely in line with the change reported in Economic Action Plan 2012.”

So instead of foreshadowing a magical, mysterious $4-billion cut, the operating expenses story in Flaherty’s new budget is pretty much about holding steady.  Yet this changes the early narrative of Budget 2013 more than a little. If a sudden, deep cut in direct program spending was required for 2013-14, then the government would be taking the arguably risky step of imposing fresh austerity in the face of slower-than-expected economic growth. Remove that $3.5 billion in one-time AECL and veterans’ pensions costs from the balance sheet, and direct program spending is actually slated to notch up—only slightly, but still up—in 2013-14.

Or look at the revised picture in terms of eliminating the deficit. The budget says the 2012-13 deficit will come in at $25.9 billion; Flaherty promises to shrink that to $18.7 billion in 2013-14, or by $7.2 billion. Considering that the one-time-only AECL and veterans’ pension costs ballooned the 2012-13 deficit by $3.5 billion, Flaherty looks to be starting 2013-14 nearly halfway down the track to his deficit goal for the fiscal year.

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