Finance’s fun with math
It’s not a fiscal crisis — yet
First, the case for complacency.
Despite what you may have read, that Finance department background paper released over the holidays, the one projecting deficits lingering on into the 2050s, does not show that we are in a fiscal crisis, or even necessarily headed for one.
Mostly, it is an exercise in fun with mathematics. Take a bunch of assumptions about labour force growth, productivity, interest rates and the like, plug them into a spreadsheet, extend out several decades and presto: Big. Scary. Numbers. As the paper itself is careful to note, it is not a forecast, but simply a projection, useful mostly for comparing the results of different assumptions.
And its baseline projection, the one that sticks closest to existing trends, is not quite as hair- raising as has been made out.
Yes, it shows federal net debt reaching $ 1.5- trillion by mid- century, more than twice its current f i gure. But, under the same set of assumptions, the economy grows even faster, to $ 8.6 trillion in 2056, more than four times its present size. Put them together, and the debt- to- GDP ratio is projected to fall, not rise, from 32 per cent at present to barely half that 40 years out.
Or i f you prefer, since the government does not actually control all of GDP, we could compare the projected costs of paying interest on the debt to federal revenues. That’s projected to grow in the short term — as interest rates pick them- selves up off their historic recent floor — but decline again over time, to just 1.1 per cent of GDP.
All this, as I say, is more or less a straight- line ex-trapolation of present trends. That’s ticklish enough looking ahead two or three years, let alone four decades — although in the absence of more definite information on the future, present trends are probably as good a guess as any. And while some of the variables that go into Finance’s baseline projection are not ours to control, some are: government fiscal policies, for example.
So even if some of those assumptions turn out to be overly optimistic, nothi ng obliges us to soldier on with present policies, decade after decade, as if nothing had changed. The study may assume present policies remain in place throughout. But present policies can change.
On the other hand — and here the case for uneasiness begins — present policies were supposed to have us well on the way to a balanced budget by now: no later than 2019, as the Liberal platform assured us, not “sometime in the 2050s.” No, the Liberals’ deliberate plunge into deficit is not responsible for the whole of the nearly trillion dollars in debt the federal government i s now projected to add to its books over t he next 40 years: mostly this is a familiar story of the baby boomers hitting retirement age, leaving relatively fewer people of working age to support the ever- growing numbers of the elderly.
Neither can the deterioration i n the fiscal pict ure si nce a si milar Finance exercise in 2014, which s howed t he debt being wiped out by 2040, be wholly laid at the feet of the Liberals: much else has changed since then besides governments, notably the collapse in world oil prices. What can be said is that the previous government — though it added $ 150 billion to the debt on its own — left office with policy set on a course that gave the country more margin for error, in case things did not turn out quite as assumed.
This is perhaps the clearest and most sobering lesson of Finance’s fun with mathematics: little things, over long periods, add up to big things. Change some key assumptions even by a small amount, and you get vastly different results.
Yes, t he surprises can as well be pleasant as unpleasant. Hold spending growth to even a quarterpercentage- point per year less than trend, the Finance paper shows, and wring out another f our- tenths of a percentage point annually in productivity growth — to 1.6 per cent per year, from 1.2 per cent currently — and the debt disappears by midcentury.
But flip those relatively mild adjustments on their heads, and the federal debt explodes to more than 50 per cent of GDP — this, even as the provinces are running up debts of their own to pay for the health c are of al l t hose aging boomers. And those are just two variables.
Suppose, f or example, interest rates climb further than expected: even a one percentage point difference is enough over time to add another 11 points to the debt- to- GDP ratio.
There’s nothing part i c ularly disquieting in the baseline scenario, in other words, even if it does mean deficits as far as our grandchildren can see — if we could be assured that events indeed stuck to that script. It’s the risks to which it exposes us that should make us nervous. The bigger the deficits, and the l onger we allow them to continue, the more exposed we are to unforeseen circumstances.
Or rather, it’s the Liberals’ apparent unconcern at this prospect that I find most unsettling. No, they aren’t going to bankrupt us in four years.
But i f we are to make the magic of compounding work in our favour over the long haul, rather than against us, we need to get started now — notably on raising productivity.
The Liberals talk a good game on the productivity challenge.
But as t heir principal strategy for addressing it has been to take on tens of billions in new debt, you will excuse me if I am not as complacent as I would like to be.