Friday, February 26, 2010

A Tale of Two Budget Deficits

Today it was announced that our federal deficit grew in December, but that it is now growing at a slower rate. The tale is reported differently in our two main national newspapers. The headline at the National Post is "Growth of Canada's deficit slows", the headline in the Globe and Mail is "Budget deficit rises to $39.4-billion" (which still projects to be smaller than forecasted). One article discusses why deficit growth has slowed, the other discuses why the deficit is what it is.

Currently the stimulus is putting the largest strain on the spending side of government finance, which we all knew was going to happen when we embarked on injecting government money into the economy during an economic downturn. This should not surprise anyone. Over a year ago all the Keynesians came roaring out of the closet to demand a stimulus, and in a minority government we had to respond to the opposition demanding it. Ignatieff demanded it after his ouster of Dion, that he would not support the budget without a stimulus. So we did a stimulus. The government having narrowly survived an attempted coup immediately following a general election was in no position to take an ideological stand. I think the stimulus has worked well, but we shouldn't be outraged when it creates a deficit. The spending is temporary.

Also, in terms of tax receipts, I haven't seen anyone mention the difference in capital gains from 2009 over capital losses from 2008. The TSX fell by 37% or -5096.04 points in 2008. The majority of people with an investment income doing their taxes last year would have reported capital losses, which lowers the amount you have to pay in income tax. In 2009 the TSX increased in value by 32% or 3000 points. So people doing their taxes right now with an investment portfolio will have to pay taxes on their capital gains. Hopefully Kevin Page has costed this into his forecast, either that or we are in for a pleasant surprise in a future economic update...


  1. It is a game day, so I'm not expecting a ton of hits. I'm trying to get some of the boring financial stuff out of the way.

  2. I can't watch the rest of USA Finland...

  3. I was hoping they´d leave Kipper in net to see if he´d have a total meltdown but really it was a pathetic showing by the Finns today. I do hope the Slovaks put up an unexpected good effort against canada later today. It would be better than winning in a walk, and better prep for the final.

    John in Sechelt

  4. I would imagine that most people will be carrying the capital loss forward. The capital loss (carried forward) would then offset the capital gain for this year, at least to some degree.

  5. If they claimed the loss last year they could have saved money on their returns last year. They had no reasonable guarantee that markets would be up in 2009. My friend went through this last year. He got wiped out in black October. Perhaps it is more profitable to carry the loss forward (if that is permitted), but all things being equal the majority of investors would rather save money now than save a little more money next year.