Minister of Finance Bill Morneau, right, is accompanied by Prime Minister Justin Trudeau as he makes his way to deliver the federal budget in the House of Commons on Parliament Hill in Ottawa on Tuesday, March 22, 2016.Sean Kilpatrick/The Canadian Press
My, how quickly attitudes around deficits have changed in high levels of Canadian government.
This time last year, we had a federal government committed to balancing its budget come hell or high water, reflecting a steadfast belief that Canadian voters wanted governments that would live within their means. Indeed, all three major federal parties were preparing to campaign on a similar pledge to maintain balanced budgets. Today, we have a new government in Ottawa that not only just introduced a budget with a nearly $30-billion deficit, but in doing so, also said it won't commit to a timetable for bringing the budget back into balance.
In Alberta, until recently the most fiscally solid province in the land, the government also conceded that it has no idea when it will be able to eliminate its $10-billion shortfall.
The shadow of a new Era of Indefinite Deficits has hit Canada's shores. It's been a while since we've seen it. I can't say we've missed it.
Maybe this shouldn't be as ominous as it sounds. After all, these governments aren't running deficits that are particularly big in historical terms, certainly not big enough to pose a threat to the well-being of the economy. Modest deficits aren't in themselves especially problematic; one prominent school of thought is that as long as you're not substantially accelerating your debt-to-GDP ratio, i.e. not straining your capacity to carry your debt, then there's nothing to fret about. You could, in theory, run them indefinitely.
There are a couple of problems with that, though. For one thing, your ability to absorb more debt depends on your economy's capacity to grow. That, unfortunately, looks likely to be in short supply during the slow-growth trend foreseen for the next decade or more, as the country's aging population taps the brakes on economic expansion. Economists figure Canada's real (i.e. inflation-adjusted) gross domestic product growth will be lucky to average 2 per cent a year over the next couple of decades; some think it will be more like 1.5 per cent.
GDP growth can also be unpredictable, volatile and, at the bottom of the business cycle, often negative. Quite simply, you can't always count on growth to pay for your deficits. Indeed, when pressures on the budget are at their highest – namely, in recessions – you can suddenly find your deficit ballooning at the precise time that GDP is contracting. There goes your debt-to-GDP target, and once it's gone, it can prove very hard work to get it back.
"There is a real risk that the economy does not grow as fast as predicted, that tax revenues disappoint, that interest rates rise more than anticipated or that more spending is called for in future budgets," said Craig Alexander, vice-president of economic analysis at the C.D. Howe Institute, in a commentary published in The Globe and Mail after Tuesday's federal budget. "Sustained deficits can add up quickly and dramatically, which is why they are not sound fiscal policy."
But the biggest issue in running deficits indefinitely is the potential to constrain your policy options when the business cycle does turn sour. If you view fiscal stimulus as an effective weapon to offset the damage of a recession, then existing deficits mean you face entering such a downturn with less ammunition than you would have otherwise.
Let's face it, one key reason Mr. Trudeau's government now has the wherewithal to boost spending in the face of Canada's current economic struggles is because the previous Harper government had reined in deficits in recent years, giving its successor loads of fiscal room in which to manoeuvre.
Indeed, if your politics lean toward the progressive, as the Liberals' do, this is the most compelling argument to maintaining a goal of bringing your budgets into balance in times of economic expansion. It gives you the fiscal means to address the country's economic needs, respond to shocks and provide financial support where and as needed. A progressive agenda is best served by well-stocked government coffers.
It's not that the governments of Canada and Alberta don't want to balance their budgets, eventually. It's just that they don't want to put a specific timetable on doing it. They will argue that this is just be a matter of practicality; they don't want to promise something that's beyond the forecast horizon that they can currently see.
But setting deficit-reduction targets has proven a pretty good way to instill discipline to restore that important fiscal cushion over time. The previous government in Ottawa, and the provincial governments in Ontario and Quebec, set firm timetables for eliminating large deficits and proved quite successful in meeting their targets, even as critics charged that those goals often seemed bound more in convenient accounting assumptions than concrete plans.
It's a lesson the current regimes in Ottawa and Edmonton would be well advised to embrace. Balancing of budgets, over time, has proven sound policy in this country, and neither of these governments would deny it. The pursuit of sound policy requires more planning than "we'll get there when we get there."