FISCAL RESTRAINT STILL MAKES SENSE, IN SPITE OF TRUMP
Reducing debt could be Canada’s secret weapon in fight against president’s tactics
Remember when you had to balance a budget to get elected in Canada?
It was the highest form of economic stewardship in the late 1990s and for at least the first decade of the new millennium. The idea was so entrenched that even Thomas Mulcair’s New Democratic Party thought it had to promise a surplus to beat Stephen Harper’s Conservatives in the 2015 election.
The NDP won’t be making that mistake again. “I think maybe it’s no longer a big issue,” New Democratic leader Jagmeet Singh told journalist Paul Wells in front of an audience in Ottawa earlier this month. Wells had asked Mulcair’s replacement whether the closest thing Canada has to a socialist party still thought balanced budgets were crucial. “I’m opposed to austerity in all its forms,” Singh said.
The aftermath of the Great Recession is now what scares voters in Canada and the United States, not stories about bond vigilantes. At the end of January, New Brunswick Finance Minister Cathy Rogers postponed her (Liberal) government’s plan to erase the province’s deficit in 2019. Instead, she and Premier Brian Gallant chose to set the stage for the September election with a budget that cuts smallbusiness taxes and spends a little extra on economic development, youth employment, and taking care of seniors.
I know what some of you conservatives are thinking: What do you expect from vote-buying Liberals and free-spending socialists? But it’s not like you guys have much credibility on the subject, given the recent performance of the political wing of your movement in Washington.
Rogers and the New Brunswick Liberals at least are talking about balancing the budget in the near future (2020, instead of 2019). President Donald Trump on Monday presented a budget proposal that would run up deficits of more than US$7 trillion over the next decade, twice what the White House forecast last spring, according to Politico.
House Speaker Paul Ryan, one of the more vigorous critics of former president Barack Obama’s deficit spending, called the Trump plan “thoughtful” and “responsible.”
Thoughtful? We can debate. But there is nothing responsible about Trump’s profligacy. Even Obama’s economists think it’s too much. “I consider myself a deficit dove,” tweeted Jason Furman, one of the previous president’s top economic advisers, adding that he’s fine with a budget shortfall of 3 per cent of gross domestic product. “But, deliberately sending an essentially full employment economy into deficits of 5 to 7 per cent is nuts.”
Canadian governments have an opportunity here if they can resist getting drunk on last year’s good economic fortune.
There’s little anyone can do to stop Trump from wreaking havoc with the international trade, and his tax cuts will lure investment that might otherwise have occurred in Canada. But Trump needn’t influence the spending decisions of Finance Minister Bill Morneau, who said Tuesday that the next budget will be on Feb. 27, or his provincial and territorial counterparts. There’s an argument to be had about whether Canada needs lower taxes on investment to remain competitive. But we should keep in mind there will also be an advantage to having sound finances, a goal that Trump’s America has abandoned.
Some think the recent chaos in financial markets is the work of those vigilantes mentioned above. Bond yields jumped before stock prices plunged. That might have had something to do with investors deciding there are safer bets than lending the Trump administration money at 2.5 per cent, the yield on 10-year Treasury debt at the start of the year.
The yield on the U.S. benchmark now is around 2.9 per cent. A possible reason: Now that all of the world’s major economies are growing again, investors have options. That means the United States will have to pay more to finance its spending than it has had to in years.
Interest rates will be rising most everywhere as central banks lift borrowing costs to stay ahead of inflation. Still, those places with reputations for sound fiscal management will have an advantage because creditors will accept lower risk premiums to finance their debt. Canada is one of those places. The federal government is one of a small number of sovereigns that survived the financial crisis with its credit rating intact, and five of 10 provinces have balanced budgets.
The prospect of relatively lower interest rates and stable bond markets is something finance ministers should protect, not exploit for short-term gains. That doesn’t mean rushing to balance budgets for the sake of it. The economics profession is less convinced of the necessity of this than it was in the 1990s, and as Harper discovered, voters won’t stand for it.
But it might mean signalling to those bond vigilantes that Canada is committed to reducing its debt.
For example, New Brunswick’s deficit remains fairly small, but its debt is projected to stay fairly large at around 45 per cent of GDP. DBRS Ltd., the bond-rating agency, was unimpressed. It said it was “concerned” about Rogers’s budget and that it “questions the credibility of the multi-year plan to return to balance.”
Reputations are won and lost. The International Monetary Fund has been advising Prime Minister Justin Trudeau for a couple of years to legislate a commitment to reduce the debt relative to GDP in order to retain the confidence of markets. Dozens of countries do this, but Trudeau and Morneau refuse. They should reconsider. It could be their secret weapon in their fight against Trump’s efforts to upend the Canadian economy.