This is not a serious policy document. There are a couple of good ideas (eg, eliminating tariffs on machinery imports), but what we were looking for was an indication of how the deficit was going to be dealt with, even if those measures didn't take effect this year. What we got was Micawbernomics: make incredibly optimistic assumptions about revenue growth.
Jim Flaherty has kicked the can to 2011. Whoever is going to be in power next year is going to have to deal with the fiscal hole the Conservatives have dug for us.
Worthwhile Canadian Initiative 
Ha. Nobody has to deal with anything, not in 2011, not ever.
Politicians have lost the ability to make tough decisions. What we have now on both sides of the house are poll-followers. A downtick in their approval means a new spending program must be undertaken.
Eventually, we’ll be just like Greece.
Well, given that my biggest point of disagreement with you over the past year has been that I thought you were overly optimistic about the state of the economy, if you are writing off the government’s forecasts as wildly optimistic, than I am truly worried! 🙂
As an aside, its funny that you mention Micawber since only a last second bout of laziness prevented me from quoting him myself in responding to Nick’s post on debt below (“Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”) I guess we can just hope that quote doesn’t end up applying to the subject of this post as well…
Neil, it will take a long time for us to become Greece, we would have to increase the public sector by a ton, and even to that, regulate and tax the heck out of everyone.
Stephen, “fiscal hole”, seriously? Military spending is being frozen for now, and it will decrease in 2011 when we start bringing the troops home from Afghanistan. Stockwell Day is going to cut a lot of spending at the treasury board. Immigration laws have been changed and workers are going to start coming once prices start adjusting. Taxes are going to remain at their current levels, followed by less red tape, could in term mean real growth instead of just inflation. Spending freezes have been announced. The BoC will probably keep rates low due to their will to compete with exports as the Euro will probably start tanking a bit with the future Greece/Spain/Portugal/Socialist-others bailouts, and the US has no intention of raising interest rates anytime soon. And tariffs are being phased out. Might you be a little too critical of the deficit at this point and time? Or are many of those factors in your estimates and I just missed it completely?
Stephen: 2002-2008 featured many tax cuts–you might remember the GST cut and the various boutique tax cuts under the Conservatives, and various other tax cuts under the Grits from 02-05.
How can you compare revenue growth in that period to revenue growth in 2010-13 with no tax cuts projected?
Governments typically assume an elasticity of revenue wrt nominal income of around 1.4 or so. I dont’t think they are way off base here.
The top-line economic assumptions are basically PS averages and slightly conservative. Maybe 2012-2014 are slightly too high.
Are you saying the revenue multipliers are overly optimistic? If so, could you point to a specific example. Revenues are expected to bounce back 8% this year, but compared to a 9% dip last year (on nom-GDP decline of 4.5%). I don’t think that’s incredibly optimistic.
Finance’s revenues are forecast to be 12.2% of GDP by 2013, compared to 12% in 2008. With no significant tax cuts and their sneaky EI increase, I wouldn’t say that’s unreasonable.
Ah. Fair enough. My quick-and-dirty OLS estimate was 1.25.
Bear in mind that much of the revenue growth (the 7% annually you mentioned) is simply in the recovery; the projections don’t get us back to 2007/8 levels until 2012. The total average growth for the period 2007-2014 (incorporating both the recession and the recovery) is only 3.2%. Not unreasonable, I think.
Kevin milligan wrote: Governments typically assume an elasticity of revenue wrt nominal income of around 1.4 or so. I dont’t think they are way off base here.
Stephen Gordon derived a quick ‘n dirty OLS estimate of 1.25.
Thank you both for this; appreciated. I knew the elasticity was greater than one but am not aware of the empirical literature. Please point.