The Liberals should not set a target date for a balanced budget, but they should take action in the 2019 budget to eliminate “unannounced” spending, included in the 2018 Budget and 2018 Update, in order to reduce the deficit in future years.
In the weeks leading up to the Fall Update, the Conservative opposition has been demanding that the Prime Minister set out a timetable for eliminating the budget deficit. The Conservatives know this is pointless since the Prime Minister and the Finance Minister won’t do it, in part because the deficit is much higher than it was when they promised a balanced budget in their 2015 election platform, and in part, because the Liberals simply don’t think it is necessary to eliminate the deficit. In the 2019 election, the Conservatives are betting that Canadians will be concerned about the deficit while the Liberals are betting they won’t.
Such an attitude towards budget balance drives Conservatives crazy, since balanced budgets are the fundamental underpinning of Conservative fiscal philosophy. Despite this, the Conservative government failed during the 1980s to take the fiscal action needed to avoid a debt crisis in the early 1990s, and they struggled under Harper to achieve and maintain budget balance.
If you want to get Conservatives really upset just remind them that, because of Conservative failures in the 1980s, it was a Liberal government, under Prime Minister Jean Chretien and Finance Minister Paul Martin, that resolved the resulting 1995 deficit/debt crisis and implemented nine years of surplus.
The current Liberal government has become rather “nonchalant” when it comes to budget policy. By the time of the March 2016 budget, the balanced budget target date was no longer part of Liberal fiscal policy. Declining oil prices, a sharp decline in business investment in the oil and gas sector, and slower economic growth meant lower government revenues and a worsening deficit situation.
The Trudeau Liberals responded in a very predictable way. They simply “trashed” their 2015 election commitment to balance the budget in 2019-20, although they stated in a rather “humorous way” that they remain “committed to returning to balance budgets, and will do so in a responsible, realistic and transparent way”. Since the March 2016 Budget, the Government has not presented any fiscal forecast that would show a balanced budget. They have a new fiscal anchor. The government is now “committed to reducing the debt-to-GDP ratio to a lower level over a five-year period, ending in 2020-21”
In the 2015 election, the Liberals ran on a budget policy of temporary deficits resulting from major infrastructure investments, the introduction of the Canada Child Benefit and a reduction in the middle tax rate. At the time, we supported this strategy. It is reasonable, after all, to argue that these initiatives would benefit future generations and, therefore, can be financed by debt, depending on long-term interest rates and economic growth prospects. Indeed with resulting higher productivity, these investments might actually pay for themselves.
Since the 2016 budget, however, Liberal budget policy has changed. It is no longer about making long-term investments, but rather about short-term “government consumption spending”. The budget principle is simple. If a government intends to run a structural deficit, then it should be able to demonstrate that the spending benefits future generations. If it doesn’t then don’t do it. The deficits should not be financed by deficits and debt, but rather by current tax increases and/or spending cuts. The Liberal government doesn’t seem to understand the difference between government investment and government consumption.
Without this incremental spending, the deficit in 2019-20 would be only $1.5 billion, instead of a projected deficit of $19.4 billion. The Liberal government had a choice two years ago. They chose higher government spending over deficit reduction. Right now the Liberal government regards a balanced budget as neither necessary or needed. This reflects the pragmatic approach that the current government has when it comes to budgets.
We think the government should have chosen deficit reduction two years ago, not because the current deficit is too large, which it isn’t; not because the debt burden is too high, which it isn’t; not because the current deficit makes the government less capable of responding to a slowdown in economic growth, which it doesn’t.
We want to see the incremental deficit reduced, because it is a deficit based for the most part, on “unannounced” “consumption” spending ($9.5 billion in the 2018 Update and $7 billion in the 2018 budget). This lack of transparency in budget spending is a very slippery road to start down. If the Liberal government feels this hidden incremental “unannounced “ spending is so important, then current taxpayers should pay for it, not future taxpayers.
Unlike Liberals, Conservatives don’t like deficits no matter what their cause. They want to get rid of deficits but they rarely know how to do it. After the 2008 recession, the Conservatives started setting deficit elimination targets, some specific and some not so specific. In the March 2010 Harper committed to balancing the budget over the medium term, but in the March 2011 Budget Harper changed that target to eliminating the deficit by 2015-16 at the latest.
But this wasn’t the end of it. In the 2012 Budget, the government once again stated that the deficit would be eliminated over the medium term, only to change this again in the 2013 Budget to 2015-16. In the following two budgets, the Government reaffirmed its commitment to balance the budget in 2015-16. Final audited financial results reported a deficit of $1.9 billion in 2015-16.
There is a lesson in all this: do not set specific dates for deficit elimination. There is a 99.999 per cent chance that a single year balanced budget target will not be met. The budgetary balance is the difference between two very large numbers – budgetary revenues and total expenses – and slight changes in these numbers can result in significant changes in the budgetary balance. It doesn’t take much to miss a target. The looser in this is fiscal and political credibility.
Neither the Liberals nor the Conservatives have any claim to fiscal credibility. We have argued in the past that to be credible, fiscal policy must satisfy four basic principles. It must be “realistic”(in its economic outlook); it must be “responsible”(in its willingness to take tough political decisions); it must be “prudent”(against unforeseen outcomes); and, it must be “transparent”(in order to be accountable). Right now, Liberal fiscal policy fails the last three principles.
Conservative fiscal policy fails all four since it is based solely on a commitment to eliminate the deficit. Such a commitment will is not credible since it has very little chance of being met. The record of previous Conservative governments, to achieve only three budget balances (with the original 2014-15 budget balance revised to a deficit with the change in discount rate methodology) over the past 35 years, would suggest the current Conservative Part may want to consider something different.
C. Scott Clark held a number of senior positions in the Canadian Government, including Deputy Minister of Finance from 1998-2001. He has a PhD in Economics from the University of California at Berkeley and is currently President of C. S. Clark Consulting.
From 1990 to 2005, Peter C. DeVries served as Director, Fiscal Policy Division, at the Department of Finance. In that capacity he was responsible for overall preparation of the federal budget. He is currently a consultant in fiscal policy and public management issues.
Their Blog is 3dpolicy.ca