‘Fis­cal an­chors’ over­board

National Post (Latest Edition) - - FI­NAN­CIAL POST - Ben Eisen Charles Lam­mam and Ben Eisen is as­so­ciate di­rec­tor of pro­vin­cial pros­per­ity stud­ies and Charles Lam­mam is di­rec­tor of fis­cal stud­ies with the Fraser In­sti­tute.

Dur­ing t he f ed­eral elec­tion, the Lib­er­als cam­paigned on a com­mit­ment to run bud­get deficits for their first three years, while promis­ing to cap those deficits at $ 10 bil­lion. They also pledged to re­turn to bud­get bal­ance by 2019/ 20. Since then, the goal­posts have moved re­peat­edly, as deficit pro­jec­tions have been steadily re­vised up­ward.

In De­cem­ber, Fi­nance Min­is­ter Bi l l Morneau backed off the $ 10 bil­lion deficit cap, re­plac­ing this “limit” with a new pledge to keep deficits small enough for the fed­eral debt- to- GDP ra­tio to shrink ev­ery year — re­peat­edly re­fer­ring to this as a “fis­cal an­chor” that would be used to pre­vent rapid de­te­ri­o­ra­tion of Ot­tawa’s fis­cal po­si­tion.

In f act, in De­cem­ber, Prime Min­is­ter Trudeau said: “We will con­tinue to de­crease ( the debt- to- GDP ra­tio) ev­ery sin­gle year be­cause that’s im­por­tant for the fis­cal health of our coun­try.”

Two months later, that “fis­cal an­chor” has been aban­doned. The gov­ern­ment’s lat­est eco­nomic out­look shows the fed­eral debt- to- GDP ra­tio in­creas­ing from 31.0 per cent this year to 31.8 per cent in 2016/ 17 ( the promised re­turn to a bal­anced bud­get by 2019/ 20 is now also in ques­tion). This is be­fore the Lib­er­als have added any of their new ma­jor spend­ing ini­tia­tives to the mix.

Once new spend­ing is fac­tored in ( ex­pected to be up­wards of $ 10 bil­lion next year alone), the an­nual deficit is likely to ex­ceed $ 25 bil­lion and the fed­eral debt-



to- GDP ra­tio will in­crease fur­ther.

The short life of this lat­est “fis­cal an­chor” il­lus­trates the dan­gers of con­stantly evolv­ing tar­gets, and the need for trans­par­ent, durable, and eas­ily un­der­stood fis­cal norms.

Re­cent years have seen the steady de­struc­tion by gov­ern­ments across t he coun­try of one such use­ful norm: the prin­ci­ple that gov­ern­ments should bal­ance bud­gets dur­ing “nor­mal” eco­nomic times, re­sort­ing to deficit spend­ing only dur­ing eco­nomic down­turns. This prin­ci­ple took hold dur­ing the 1990s, when gov­ern­ments across Canada averted cri­sis by de­ci­sively rein­ing in gov­ern­ment debt that had ac­cu­mu­lated for decades af­ter on­go­ing, rou­tine deficit spend­ing.

Hav­ing l i ved with the con­se­quences of run­away debt and hav­ing made hard choices to get it un­der cont r ol, gov­ern­ments t hen gen­er­ally avoided run­ning deficits dur­ing pe­ri­ods of eco­nomic growth. This ap­proach helped cre­ate the con­di­tions for a pro­longed pe­riod when the econ­omy boomed and pub­lic debt steadily shrank.

Un­for­tu­nately, pol­i­cy­mak­ers across Canada have lately aban­doned the long­stand­ing norm that deficit spend­ing — par­tic­u­larly in the name of “stim­u­lus” — should be re­served for steep eco­nomic down­turns.

The prob­lem with un­writ­ten fis­cal norms, such as the one that gov­ern­ments gen­er­ally ought to bal­ance bud­gets, is that they take a long time to de­velop and ce­ment. Once the goal­posts are moved, and a ba­sic, long­stand­ing fis­cal prin­ci­ple is re­pu­di­ated, it be­comes much eas­ier for gov­ern­ments to move them again.

This is pre­cisely what has hap­pened. The $ 10 bil­lion deficit cap that re­placed a sim­ple bal­anced- bud­get tar­get barely sur­vived the elec­tion be­fore it was re­placed with the de­clin­ing debt- to-GDP fis­cal an­chor. That new “limit” was even more short­lived. Crit­i­cally, all this is hap­pen­ing while the gov­ern­ment ex­pects pos­i­tive (al­beit mod­est) eco­nomic growth next year. The re­cent eco­nomic out­look projects nom­i­nal GDP to grow 2.4 per cent in 2016 — even us­ing a con­ser­va­tive “fore­cast ad­just­ment” that re­duces ex­pected GDP by $40 bil­lion.

The pre­vail­ing view that gov­ern­ments should avoid rou­tine deficits has served Canada well, but it has now been largely aban­doned, and the hastily as­sem­bled “fis­cal an­chors” de­signed to re­place t his hard- won prin­ci­ple have proven too flimsy to hold firm against the fed­eral gov­ern­ment’s weak­ness for spend­ing.


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