The news that Ottawa will post a dramatically smaller deficit – $5.2 billion versus the $16.6 billion forecast – indicates Ottawa is moving into surplus territory quicker than anticipated. Although Stephen Harper stated Ottawa is still expected to post a small deficit for the 2014-15 fiscal year, analysis from TD Economics forecasts a $5-billion surplus and more surpluses thereafter.

In fact, Ottawa may be on track for $71 billion in surpluses over the next six years. It would appear that the lean years are over.

Ottawa has balanced the budget while shrinking the federal government’s fiscal footprint. As a percentage of GDP, federal government revenue is the lowest it has been since the mid-1960s. Indeed, the last budget predicted revenue to GDP of 14.4 per cent by 2018-19 compared to program spending taking up only 12.4 per cent and public debt charges 1.6 per cent. The prospect of an era of surpluses will generate a new dynamic as the prospect of relative abundance sparks demand for new initiatives.

What should the federal government do with its newfound abundance? The more relaxed fiscal constraints will allow the Conservative government to go into an election year with a platform of initiatives funded from the growing surplus. Here are some candidates.

  1. More money to pay the debt. This is a non-starter in an election year as the photo opportunities from governments for paying down the debt are not the stuff election campaigns are made of. The federal debt to GDP ratio is below 35 per cent and a growing GDP erodes that share without paying down a dime of the debt. Moreover, interest rates are still low and public debt charges not an enormous burden on the government.
  2. More money for the provinces. This is another non-starter. The federal government rarely gets credit for handing the provinces money to announce their own new initiatives. Since 2005-06, federal transfers to the provinces and territories have grown by $23 billion, but you would never know that from the lamentations of provincial premiers. The one area where one might have anticipated new money is health, given our aging populations. However, the federal government has already put those demands in abeyance by announcing that, after 2017, federal health transfers will grow at the rate of growth of GDP. Moreover, the provinces have access to as many revenue sources as Ottawa does, and if they want to spend more, they should simply raise their own tax rates – and take the heat for doing so.
  3. More money for municipalities. This might have some traction given that money for new physical infrastructure generates ample venues for federal ministers to have their picture taken and optics are extremely important in an election year. On the other hand, our constitution makes municipalities creatures of the provinces. Why help the provinces indirectly if you are unwilling to help them directly?
  4. More money for people. This is where the federal government will likely go and one can expect the government to deliver on income splitting for couples with children under age 18. However, the real question is whether this is the best way to deliver tax relief? Should tax relief be targeted or broad based? Why income splitting and not a reduction in income tax rates? This is an important discussion, and a broader discussion about the tax system has not occurred in Canada since the late 1980s when the foundations for income tax reform and the GST were laid.

Ideally, one wants a more reflective and thoughtful approach to what Ottawa should do with the money, particularly given the volatility of the global economic environment and the aging of the Canadian population with the spillover effects on health care and the labour market.

Along with a systematic review of the tax system, where should the federal government go with respect to new infrastructure spending? Should we four-lane the Trans-Canada? Build new ships to assert Arctic sovereignty? Invest in aboriginal education? Where will we get the most value for our tax dollars?

This might be one of the times we actually welcome a Royal Commission on new directions for dealing with the anticipated federal surplus.

Livio Di Matteo is professor of economics at Lakehead University.