Canada's budget surplus (yes, really)

Not getting much attention in the media, but Canada's Federal budget has swung sharply into surplus so far in fiscal year 2022/23, which began in April. Data released by the Department of Finance this morning show a surplus for the three months April-June of C$ 10.2 billion, compared to a deficit of C$ 35.6 billion in the corresponding period last year.

Most people's first guess, including mine,  would be that the improvement is largely down to rising revenues, particularly in light of the surge in energy prices. It turns out this is not entirely the case. To be sure, revenues are up sharply -- more than 20 percent, in fact -- but the Fiscal Monitor describes the rise as "broad based". The biggest contributors are corporate and personal income tax revenues, consistent with the ongoing recovery in the economy. However, a bigger contribution to the turnaround can be found on the spending side: program outlays fell 25 percent, largely as a result of declining transfers to persons, through falling unemployment benefit payouts and the virtual elimination of COVID-related transfers. 

The data almost totally destroy the arguments about fiscal policy being put forward by the likely new Conservative Party leader, Pierre Poilievre. His view that what he calls "Justinflation" is entirely the result of out-of-control public spending financed by the Bank of Canada's printing presses was never remotely accurate and now looks totally asinine.  So far, no comment on the data from the Poilievre camp. Well, it is the last Friday in August, after all. 

Leaving aside the politics of all this, it's worth asking whether the swing into surplus is actually a good thing. After several years of dismal fiscal results, it is useful to have a reminder that strong economic growth is almost always the best way to solve a fiscal problem. Justin Trudeau's much ridiculed statement that with a growing economy, "the deficit will fix itself" is much more true than not. 

The flipside of this, however, is that fiscal policy is for the moment, rather unexpectedly, working alongside monetary policy to put the brakes on the economy. This may help get inflation back to target rather sooner, but obviously heightens the risk of tipping the economy into recession. If the good fiscal news continues, expect some sort of mini-budget in the Fall where the Government can spend some of this unexpected windfall.