Can these Liberals copy Chrétien?
“A Liberal government will reduce the deficit. We will implement new programs only if they can be funded within existing expenditures. We will exercise unwavering discipline in controlling federal spending .… Expenditure reductions will be achieved by cancelling unnecessary programs, streamlining processes and eliminating duplication.”
It’s hard to imagine the Liberals making such a promise in this day and age, but that is what they pledged to do in their 1993 Red Book. Contrast that to the 2015 election, when the party campaigned on the idea of running $ 10- billion deficits for three years, for a total of $ 30 billion — a limit they blew through ( and it wasn’t even close). Or the 2019 election, when it gave up on balancing the books altogether and introduced a plan to run yearly deficits of $20 billion over its four-year mandate.
The coronavirus, however, changes everything. Those deficits now seem like chump change in the face of the Parliamentary Budget Officer’s (PBO) April 30 forecast of a $252.1-billion deficit in 2020-21 — a number that, given the spate of spending announcements since then, he now says is likely to prove “very optimistic.”
As a percentage of the economy, even the optimistic number would be the highest on record. And that doesn’t include the provinces, which have also seen their expenditures balloon. All told, a National Bank Financial report this week estimated that combined federal and provincial deficits could reach a staggering $ 350 billion, which represents about 20 per cent of gross domestic product.
If there’s any good news, it’s that the massive increase in government spending that we’ve witnessed since the start of this pandemic will (hopefully) be temporary. Yes, COVID-19 has exposed critical holes in our health- care system, long- term care facilities and supply of critical goods that will require longterm expenditures in order to address. But the vast majority of the spending — the financial support for workers who have lost their jobs and companies that have lost their revenue streams — can easily come to an end once the health threat subsides.
That’s not to say that it is inevitable, though. We have already heard calls for the government to transform the Canada Emergency Response Benefit into a universal basic income program, for the state to use this crisis as an opportunity to replace fossil fuels with green energy … pick your pet cause and chances are that someone is using the coronavirus as an excuse to push it.
But the Liberals must resist these calls, because the fact is that we will not be able to afford any of it. We won’t even be able to afford any of the programs, like universal pharmacare, that Parliament was considering at the beginning of the year.
The Liberals justified their deficit spending before the pandemic by citing Canada’s relatively good debt- to- GDP ratio, the amount of government debt relative to the size of the economy. Yet the PBO estimates that the national debt will hit $962 billion this year, up from $685 billion in 2018, and could easily top $1 trillion — that’s a one with 12 zeros — the year after.
Meanwhile, Statistics Canada released a “flash estimate” last month, which suggested that real GDP shrank nine per cent in March. The PBO’S scenario estimates that real GDP will decline by 12 per cent this year, which would be four times worse than the worst year since we started keeping records in 1961.
Divide those two numbers and we could be looking at a debt- to- GDP ratio of nearly 50 per cent by the end of the year. This, however, would not be unprecedented: it stood at a whopping 66.6 per cent in 1995.
That was when prime minister Jean Chrétien and finance minister Paul Martin launched an aggressive effort to balance the budget that still makes conservatives jealous. They did so not by massively increasing taxes, but by cutting federal spending by 14 per cent between 1995 and 1998. Thanks to these austerity measures, the economy prospered, growing between four and five per cent a year between 1997 and 2000. Accordingly, our debt- to- GDP ratio dropped to 29 per cent by 2009.
Barring a sudden end to their minority government, when the current crisis abates, Prime Minister Justin Trudeau and Finance Minister Bill Morneau will face a similar situation. It has always seemed somewhat paradoxical that Chrétien and his American counterpart, president Bill Clinton, were able to balance their budgets in the ’90s, while their conservative successors watched them balloon once again. Yet centre- left governments often find it easier to drastically reduce spending, because people tend to believe that they are doing it out of necessity, rather than ideology, and therefore are more inclined to give them a pass.
Will this current crop of Liberals follow in the footsteps of their predecessors and do what needs to be done to stabilize this country’s finances, retaining the prosperity that sustains our way of life and preserving it for future generations? We certainly hope so, but their own recent history is cause for concern.