We can do better than shrug and say, ‘Well that’s politics.’ Gordon,
Post-war federal governments have followed — or tried to follow — the standard Keynesian recommendation of balancing the budget over the course of the business cycle. The strategy hasn’t always worked out in practice, but it has defined how we interpret government deficits and surpluses. The recent fiscal update confirms that Liberals have now decided to abandon that tradition and focus on maintaining a stable or declining debt- to- GDP ratio stable. This raises some questions.
I’m not much fussed about the question that has dominated commentary on this decision: whether or not it will lead directly to a debt crisis ( no, it won’t). What I want to know is why the Liberals made this decision, and when.
The obvious reason for moving from a balanced budget fiscal to a fixed debtto- GDP ratio is that it lets government score the trifecta of increasing spending, not increasing taxes, and still observing a fiscal anchor. The actual size of the increase depends on the size of the debt ratio and the growth rate of GDP. If, as the fall update projects, nominal GDP grows at four per cent a year, then government spending can be sustained at a level that is about 1.2 percentage points of GDP — roughly $25 billion a year — more than the balanced budget case. That’s an almost 10 per cent increase in total spending.
This trick can only be pulled off once, so you’d think that the Liberals might have had a special project in mind. Not so much, as it turns out. True, they do have an infrastructure program, but it hasn’t gotten to the point where money is being spent. Instead, the extra fiscal space has been sprinkled around seemingly haphazardly — paying off faithful clients, and buying off trouble when it appears. I, for one, can think of better ways for the federal government to spend a windfall of $25 billion a year. It’s as though a fiscal genie offered to grant the Liberals one wish, and they chose to ask for some extra spreadingaround money.
The Liberals still haven’t explained why they have made this choice. It’s possible to sustain deficits while maintaining a constant debtto- GDP ratio, and doing so does not lead inevitably to a debt crisis. But on the other hand, it does increase the risk of one occurring. Is that a risk worth accepting in exchange for a bigger slush fund?
Then there’s the timing. As those with memories stretching all the way back to 2015 may recall, the original plan as set out in the Liberals’ platform was to run deficits of $10 billion for two years, spend the proceeds on infrastructure investment, and then return to balance in years three and four of their mandate. The Liberals’ plan was a modest deviation from budgetary tradition, and there was little reason to think at the time — or even in retrospect — that it couldn’t be carried out. But it wasn’t, and it’s becoming less and less clear that the Liberals ever meant to carry it out.
The Liberals’ insistence in the early weeks of its government that federal finances were in dire straits was difficult to understand at the time: revenues were running ahead of what had been projected in the Conservatives’ last budget. And their first budget — with deficits of almost $ 30 billion dollars in the first two years — was equally perplexing. The economy was not in recession (the slump everyone had been talking about happened in early 2015, and had hardly affected revenues), and the infrastructure program wasn’t going to start spending money for years.
What happened to that strategy they had campaigned on ?“The economy tanked” is not a valid answer: projections for constantdollar revenues in last week’s economic update are almost exactly the same as those in the Liberal platform, which were in turn based on the Conservatives’ 2015 budget. As Andrew Coyne has pointed out in these pages, the Liberals’ are running these deficits not because circumstances have forced them to do so, but because they choose to do so.
This brings us to the issue of when, exactly, the Liberals made that choice: did they campaign on a program that they never intended to carry out? It’s a vexing question, especially for those of us who took the Liberals at their word during the election campaign and spent time working through the numbers in their costing documents to see if they checked out. ( I confess that some of my irritation with this file is that all that wonkery in 2015 turned out to be a waste of time.) The Liberals should have simply said during the campaign that they would keep federal debt at 30 per cent of GDP, instead of continuing to reduce the debtto- GDP ratio to 25 per cent as the Conservatives wanted.
We’re all supposed to be inured to politicians saying one thing in a campaign and doing another in power, but that doesn’t mean that we should just shrug it off and say, “Well, that’s politics.” It doesn’t have to be. To reprise a refrain made popular in the last election campaign, we can do better.