Lib­er­als ditch fis­cal pledge

National Post (National Edition) - - FP COMMENT - CHARLES LAM­MAM, BEN EISEN AND MI­LA­GROS PALA­CIOS Charles Lam­mam, Ben Eisen and Mi­la­gros Pala­cios are an­a­lysts with the Fraser In­sti­tute. www.fraserin­sti­

It’s hard to keep track of all the fed­eral gov­ern­ment’s bro­ken prom­ises on deficits and debt. And that’s a prob­lem. Fis­cal cred­i­bil­ity is im­por­tant, not only for the coun­try’s fi­nances, but for po­ten­tial in­vestors and en­trepreneurs who are con­sid­er­ing whether or not Canada is a good place to do busi­ness.

While the re­cent fed­eral bud­get con­firmed the gov­ern­ment’s lat­est fis­cal prom­ise will be bro­ken, let’s first start with the Lib­eral 2015 elec­tion plat­form, which promised “mod­est short­term deficits of less than $10 bil­lion in each of the next two fis­cal years” and to “re­turn Canada to a bal­anced bud­get in 2019/20.”

These prom­ises, of course, barely out­lived the cam­paign. Within months of be­ing elected, the Trudeau gov­ern­ment backed away from both com­mit­ments.

By the time of its first bud­get in early 2016, the gov­ern­ment aban­doned en­tirely its com­mit­ment to bal­ance the bud­get, pre­sent­ing sub­stan­tial deficits through to 2020/21 — a year af­ter its first man­date ends. In some years, the pro­jected deficits tripled the amount promised in the Lib­eral plat­form.

Once it be­came clear that the gov­ern­ment had no in­ten­tion of bal­anc­ing the bud­get dur­ing its man­date, it quickly cre­ated new fis­cal tar­gets cen­tered on the coun­try’s debt-to-GDP ra­tio. This is an im­por­tant met­ric that mea­sures the bur­den of a gov­ern­ment’s debt rel­a­tive to the re­sources avail­able in the econ­omy to sus­tain that debt. But even af­ter piv­ot­ing to this met­ric, the gov­ern­ment Fi­nance Min­is­ter Bill Morneau and Prime Min­is­ter Justin Trudeau hold copies of the fed­eral bud­get, which breaks the gov­ern­ment’s lat­est fis­cal prom­ise. has re­peat­edly moved the goalposts and bro­ken sev­eral prom­ises.

Ini­tially, the gov­ern­ment promised to “re­duce Canada’s fed­eral debt-to-GDP ra­tio each year.” Af­ter the elec­tion in late 2015, Fi­nance Min­is­ter Bill Morneau re­peat­edly pointed to an­nual re­duc­tions as a “fis­cal an­chor” that year’s level.

Af­ter break­ing that prom­ise, the gov­ern­ment made an­other prom­ise, that: “By the end of our first man­date, Canada’s debt-to-GDP ra­tio will be lower than it is to­day.”

Fast for­ward to last week’s 2017 bud­get. Ac­cord­ing to the gov­ern­ment’s own pro­jec­tions, this lat­est prom­ise debt-to-GDP ra­tio may be higher than the gov­ern­ment now projects. For one thing, the pro­jec­tions are based on ques­tion­able as­sump­tions about Ot­tawa dra­mat­i­cally slow­ing the rate of spend­ing growth in the fu­ture.

Start­ing in 2018/19, the bud­get plans to re­duce in­fla­tion ad­justed per-per­son spend­ing, which would be a marked de­par­ture from the gov­ern­ment’s track record. There’s no plan for how ex­actly such spend­ing re­straint will be de­liv­ered. And equally im­por­tant, it con­tra­dicts the gov­ern­ment’s own rhetoric about how more spend­ing will help grow the econ­omy.

In fact, us­ing as­sump­tions about fu­ture spend­ing that more closely align with the gov­ern­ment’s track record to date, Ot­tawa may add up to an­other $122 bil­lion in debt over what it’s cur­rently pro­ject­ing from 2018/19 to 2021/22. That would cause the debt-to-GDP ra­tio to rise fur­ther still, po­ten­tially reach­ing 33.0 per cent by 2021/22 .

Im­por­tantly, these re­vised debt pro­jec­tions do not ac­count for other risks that could cause the debt to climb even higher in­clud­ing low­erthan-ex­pected eco­nomic growth and higher-than-ex­pected in­ter­est rates.

Less than two years into the gov­ern­ment’s man­date, it’s in­creas­ingly wor­ry­ing the num­ber of times it has dis­carded its fis­cal an­chor when the dis­ci­pline it is meant to im­pose be­comes in­con­ve­nient. With the un­cer­e­mo­ni­ous dis­card­ing of the debt-toGDP prom­ise, it’s clear that fed­eral fis­cal pol­icy is be­ing set with­out any fis­cal an­chor at all.

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