Liberal government’s debt-cap promises in doubt

Theglobeandmail.com
Dec. 15, 2015

The new Liberal government appears to have quietly abandoned its key election promise to limit budget deficits to $10-billion in each of the next two years. And a raft of economists believe this is a good thing.

While not explicitly jettisoning the $10-billion-deficit commitment, Finance Minister Bill Morneau said Monday that his top priority is making sure that the debt, as a percentage of Canada’s gross domestic product, steadily declines.

“In terms of any prospective deficit, we are trying to do a few things that we think are going to be very, very important for our economy,” such as investments in infrastructure, Mr. Morneau told an audience at the Toronto Region Board of Trade. At the same time, “we want to focus on ensuring that we can reduce our net debt-to-GDP over the course of our mandate.” He added that, whatever the deficit numbers might be in the short term, “we plan on getting to a balanced budget by the end of our mandate.”

Economists are applauding Mr. Morneau for worrying more about investments than deficits. “My advice to them would be to stick to your plan” to increase spending, McGill economics professor Chris Ragan said in an interview. He believes that deficit numbers are not particularly useful when judging a government’s fiscal prudence. For Prof. Ragan, “a far better measure is looking at the debt-to-GDP ratio.” As long as that number is stable or declining, he said, the government is on the right track.

Prof. Ragan estimates that the federal government could run deficits of $18-billion to $24-billion a year, without increasing the federal debt as a percentage of the overall economy.

But allowing deficits to head north of $10-billion in order to fund campaign promises would make it very difficult for Mr. Morneau to keep his pledge to balance the budget in time for the 2019 election – a pledge that David Johnson, an economist at Wilfrid Laurier University, believes the Liberals should also be prepared to abandon if necessary.

“No one should ever fixate on zero,” he said in an interview. “It’s a purely political number.”

The Liberals have already acknowledged that their plan to raise taxes on upper incomes while lowering them on middle-income earners will not be revenue-neutral, as the election platform had predicted, but will instead create a $1.2-billion shortfall.

But there is far more to the Liberal agenda than tax changes. The government’s promised infrastructure investments total $125-billion over 10 years. Ottawa is also promising to negotiate a new health-care agreement with the provinces, which presumably will increase transfers above the 3-per-cent minimum put in place by the previous Conservative government. Returning to the 6-per-cent increases that the Paul Martin government agreed to could cost more than $1-billion a year, according to Emmett Macfarlane, a political scientist at University of Waterloo.

And Prime Minister Justin Trudeau has also pledged to implement every one of the Truth and Reconciliation Commission’s 94 recommendations, which would lead to major increases in funding for First Nations living on reserve and for other indigenous Canadians. There are jet fighters to buy and ships to build, along with enhanced child benefits, though these will be means-tested. And there is still no word on what it will cost the federal government to meet its commitment to combat climate change.

Daniel Beland, a specialist in fiscal and public policy at the University of Saskatchewan, considers it “improbable” that the Liberals will be able to limit their deficits to $10-billion in the next two years, given weak growth and the ambition of the Liberal commitments, and equally improbable that the government will deliver a balanced budget in 2019, unless the gap between those commitments and government revenues is closed by raising taxes. For Prof. Béland, hiking the GST to 7 per cent, the level it was at before the Harper government lowered it to 5 per cent, is worth serious consideration.

“It’s certainly something they should think about, though politically it’s very toxic,” Prof. Béland said. Restoring the GST to 7 per cent, he said, would bring in an estimated $13-billion in revenue - enough to fund all the Liberal commitments while keeping the budget balanced or very close to it.

“The cuts were a misguided decision, and purely political,” he maintained. “Considering the spending agenda of this new government, it may be possible to ... at least say all the options are on the table.”

The choice, in short, appears to be either an indefinite run of deficits to fund expanded government commitments, or higher taxes to pay for those commitments. In either case, a deficit of no more than $10-billion a year appears to have already become a fading memory.