TD Bank economists see no scope for tax cuts or new federal spending amid current revenue estimates and spending promises.

“The government has not only left itself with no scope for tax cuts or new spending measures above and beyond what has already been committed to since the June election campaign, but the implementation of many of these promises is unlikely to occur until the second half of its mandate,” says a new report from Don Drummond, TD senior vice president & chief economist
and Derek Burleton, senior economist.

“All in all, this approach would be tantamount to balancing fiscal policy on a high wire, with any unexpected breeze enough to knock the government off its delicate footing,” it says.

TD notes that the total price tag of the platform promises is $28.3 billion, and estimated federal resources are $40.0 billion, suggesting that the federal government has significant wiggle room. “But, this tells only part of the story,” it cautions.

The cost of other initiatives, which are likely to be funded but aren’t yet costed, such as funding for catastrophic drug coverage as well as an annual increase in Canada Health Transfer, is projected by TD top bring the total cost of the commitments over the next five years to $37 billion, leaving a razor-thin $3 billion in resources left in the cupboard.

The timing of spending plans probably means Ottawa has no spending, or tax cutting room in the coming year. TD says that the situation begins to improve in fiscal 2006-07, at which time, the government will be in a position to begin tackling some non-health priorities.

“Nonetheless, the still-modest amount of fiscal room at the government’s disposal will allow programs to be ramped up only gradually. Moreover, based on our calculations, the federal government will exhaust all available resources until fiscal 2008-09,” it says. “Keep in mind that this assumes that the government finds the available savings, spends the amount set aside for economic prudence, and nothing else comes along in the interim that requires new funding.”

TD’s analysis is predicated on the “base case” scenario presented in both the Fall 2003 Update and March budget.

“There is a good case to be made that the federal government – and the provinces too – have been enjoying a stronger fiscal performance than that projected at the time of the budget on the back of higher-than-expected corporate and personal income-tax revenues at the end of fiscal 2003-04 and in early fiscal 2004-05,” it says. “But, while this implies somewhat more leeway in the short run to implement the platform commitments, we are skeptical that the windfall would alter our conclusions drastically.”