‘Fiscal anchors’ overboard
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-
ONCE GOALPOSTS ARE MOVED… IT BECOMES MUCH EASIER TO
MOVE THEM AGAIN.
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.