Deficits, Balanced Budgets and Balanced Budget Legislation in Perspective
A prominent and perhaps defining issue in the federal election was the Liberal promise to run deficits of about $10 billion for three years to invest in infrastructure and spur tepid economic growth across the nation. The Conservative government, running on a promise of modest budget surpluses for the foreseeable future, characterized the Liberal plan as a “reckless” recipe of “massive deficits.” The NDP also promised balanced budgets if they were elected in contrast to the “reckless” Liberal proposal of running deficits. Recent balanced budget legislation passed by the Conservative majority government to discourage, if not prohibit, deficit spending was a potential backdrop to this discussion but was largely ignored by all parties including the Conservatives.
Ten billion dollars is certainly a lot of money in many contexts but how “massive” is it relative to federal revenues and the size of the economy? The proposed deficit is about 3.5% of total federal revenues of $282 billion for the 2014-15 fiscal year and 0.5% of current GDP of about $1.98 trillion as of the second quarter of 2015, so, it is hardly massive in these contexts. There are certainly larger concerns in provinces like Ontario, where the projected deficit of $10.9 billion is 9.2% of estimated revenue of $118.5 billion and 1.5% of the second quarter GDP estimate of $736.2 billion according to the 2015 Ontario budget papers. Nor does it seem reckless in the context of an economy growing below capacity despite record low interest rates that defy further monetary accommodation and an economy with some fiscal latitude. As the last federal budget papers attest, Canada’s debt-to-GDP ratio is the lowest among G7 countries at just under 40% compared to a G7 average (and U.S. ratio) of just over 80%. Indeed, if the federal deficit is contained to $10 billion and the Bank of Canada’s modest projections for GDP growth in the order of 1% for 2015 and 2% for 2016 are realized, then Canada’s debt-to-GDP ratio will continue to fall, albeit more slowly than would occur under a balanced budget or modest budget surpluses.
A significant proportion of Canadians seem to have agreed with Trudeau’s argument that the current period of slow growth is not the time to fixate on balancing the budget but rather a time to borrow at low interest rates to make strategic infrastructure investments that will assist monetary policy in encouraging output and job growth and hasten a return to an economy growing at or near its potential. And there is no shortage of proposals to address Canada’s soaring infrastructure deficit that is now estimated at somewhere between $225 billion and $570 billion as neglected infrastructure maintenance and new infrastructure needs continue to mount. While these estimates and their associated details bear careful scrutiny, there seems little doubt that many infrastructure projects are viable and socially beneficial and can also contribute to employment and output growth in the short to medium term. Indeed, the Liberal plan to increase federal infrastructure spending from $65 billion to $125 billion over the next decade in increments of $9.5 billion per annum still seems modest in light of the scale of the problem. Added to the other Liberal promises and some uncertainty about the prospects for a return to more robust economic growth, the problem is less likely to be finding ways to spend the additional funds but finding the fiscal compass to resist overspending and turning a modest deficit proposal into a more serious erosion of Canada’s fiscal position.
The balanced budget legislation passed in the last parliament may complicate matters. Since the Iaw prohibits deficits except in extraordinary circumstances that would not apply to basic infrastructure needs, imposes a wage freeze on public servants and a pay cut of 5% on Ministers and Deputy Ministers, requires the Finance Minister to present a plan to restore budget balance, and forbids the accumulation of a fiscal stabilization or rainy day fund when surpluses arise, it has been characterized as more stringent than any of the provincial balanced budget legislation currently in effect. While there might be some room for creative accounting, it is unlikely to be sufficient or even palatable to a government that has won its mandate on the promise of a deficit and transparent government. Hence, much like most of the provincial legislation, the federal balanced budget legislation may have to be suspended, revised or abolished, raising further questions about the wisdom of balanced budget legislation to ensure sensible fiscal policy.