We are experiencing a Canadian fiscal time warp. It is 2002 and John Manley has replaced Paul Martin as the Liberal’s finance minister, and any semblance of restraint has gone out the window. Substituting today’s actors, Liberal finance minister Bill Morneau has replaced the Tories’ Jim Flaherty and Joe Oliver and as of 2015 all the spending controls the Conservatives used to bring the budget into balance have been replaced by a shotgun spray of “investment” initiatives. Budget deficits continue long into the future with no plans to achieve balance in the projections up to 2023-24 as tabled in the budget document’s annex.
If you are upset by this in any way, Mr. Morneau is asking you to console yourself with the knowledge that regardless of $19.8 billion in deficit in 2019-20, the federal debt-to-GDP ratio will continue to fall, expected to trend below 30% of GDP. But the trend can be maintained only if there are no shocks to the world economy that would impact Canada, no trade wars erupt, there is no recession in the next six years and that the new spending, ahem, investments in Canadians do not balloon beyond their program estimates. That sunny disposition stands in stark contrast to the macro-economic analysis that the Liberal’s own budget document lays out in the first 30 pages of the budget annex, which discusses potential threats around the world and challenges at home. How can the front section of the document present such an optimistic view when the back end is so gloomy?
There is a clear admission that economic forecasts have been revised downward since 2018 and that significant segments of the Canadian economy, notably oil and gas, continue to face pricing and investment challenges.
Clearly the Liberals’ focus groups and strategy sessions have determined that as long as the annual deficits are not scary during good times (read, $30 billion and up) then the government is free to sprinkle fiscal goodwill on targeted voting groups like millennials desirous of home ownership, rural Canadians hankering for internet service, and displaced workers looking to subsidize their job retraining. The government feels that even if there is a recession, they would have the fiscal reserves to see the deficit rise to $50 billion to stimulate the economy without jeopardizing Canada’s credit rating.
So maybe for the federal government, deficits don’t matter. For the provincial governments, deficits and debt are a chronic problem and a serious ongoing concern. Ontario has an annual deficit of $20 billion and their debt-to-GDP ratio will soon become the worst in Canada if not remedied by Ford’s PCs. Quebec is the poster child for fiscal responsibility today with our multi-billion-dollar surplus, but it took years of austerity under the Couillard Liberals to get there. The provinces were the victims of downloading from the federal government and limitations on future transfer payments in the 1990s as Paul Martin slayed the federal budget deficit at that time, which topped out at $42 billion in 1993 dollars before the Liberals were elected that year. Martin succeeded but transferred the problem to the provinces. The provinces are suffering still, Quebec is the only one in surplus this year.
The picture is far more menacing when federal and provincial government debts are merged together and you realize that regardless of the good behaviour of the federal government over the past decade, total debt-to-GDP is hovering at the 90% level in Canada. This is disturbing, because if you couple that with record Canadian consumer debt that now surpasses 100% of GDP, Canadians are the debt gourmands of the G7! Some Canadians may care about federal debts and deficits, but as a group we seem to care not about our credit card, mortgage and auto loan debt. We point the finger at governments and label them as spendthrifts, but we don’t look in the mirror and it’s our household finances that impact families far more directly than federal and provincial debt levels.
If we have another recession in the next few years and are looking for fiscal stimulus, only the federal government has the capacity to spend enough, and quickly, to try to counter the economic cycle. The provincial governments will not have the room in their budgets to massively spend their way out of a soft economic period. Worse yet, Canadian households have racked their personal debt levels to historic highs and likely do not have the borrowing capacity to make up for earnings shortfalls or unexpected expenses. We had better hope that the good times continue for Canada in line with the predictions used to justify the extra $22 billion in spending over the next five years that was planned for in the budget document.
It did not have to be this way. It was possible for the Liberals to close the budget gap and achieve surplus even while funding their priorities. They could have continued the Tory initiative to kill off old programs that had outlived their useful life, known as “perennial sun-setters.” That rationalization did not take place and new program and discretionary spending was added on top of passé commitments. Eventually, deficits matter – there is no escaping the economic cycle and we cannot afford to be without fiscal capacity the next time we need stimulus for real.