Deficit puts Liberals in tough place
Sunny days are starting to seem like a distant memory for the new Liberal government, as brute reason begins to rain all over their parade.
Bill Morneau, the finance minister, threw the latest bucket of cold water on the postelection euphoria when he released a fiscal update that illustrated just how badly the economy has deteriorated since Budget 2015.
Growth has been battered by anemic commodity prices and weakness in the global economy. Without taking into account the Liberals’ spending commitments, the $2.4-billion surplus forecast in the budget has turned into a $3-billion deficit this fiscal year. The same $5-6-billion swing is forecast to repeat itself in each of the next three years, until surpluses return in 2019/20.
To repeat, that’s without taking into account the net $10-billion or so of annual new spending promised in the Liberal election platform.
The options for Justin Trudeau and his cabinet just got pretty limited — renege on some of their promises; plunge the economy further into deficit than $25-billion over three years and fail to balance the books in 2019; or, raise taxes/cut spending.
Morneau cut a suitably inscrutable figure when pressed on the issue, saying it was too soon to give specifics on what the new government might do.
But he offered a broad hint that the time honoured prerogative of all incoming governments — the cupboard is exactly as bare as they have been saying it is — will mean delayed gratification.
“Strike a balance between fiscal discipline and our promises to Canadians,” he said. “The economy has not performed as well as predicted in the last budget, but the situation is not without hope … We want Canadians to know upfront, we’re committed to implementing our promises over the course of our mandate.”
But things don’t always happen just because politicians want them to. The fiscal situation is one they have inherited, but it makes it all but impossible to live up to all the promises made during the election.
At one level, it hardly matters. The real economic metric that counts is the debt-to-GDP ratio, and that falls in the scenario painted in the new fiscal update; it falls if the Liberals add a further $10-billion a year to the debt; and it even falls if they add $20-billion a year to the nation’s indebtedness.
But it is never good for the credibility of a government to break promises before they have been forgotten by voters.
The Liberal campaign document is already looking a little light on the plausibility front, given a government document obtained by the Canadian Press that estimated the cost of resettling 25,000 Syrian refugees at $1.1-billion between now and 2021. The Liberals had budgeted for $150-million in their platform. It would be no surprise if the government also pushes back its Jan. 1 deadline, as reality begins to bite.
What we know for sure is that during the election, the Trudeau Liberals committed to deficits of $25-billion over three years, before returning to surplus in time for the next election.
Now, the new finance minister is not ruling out deficits that would be considerably deeper and he made no commitments to balancing the books in 2019/20, beyond saying he “aspires to budgetary balance.”
Morneau has made an impressive start to his tenure as finance minister — in that he has been “open and transparent,” while saying absolutely nothing of note. He looks like a man capable of completing the Financial Times polymath crossword, which is re-assuring. “We know we have to act responsibly,” he said, which was too.
He can hardly be blamed for the collapse in the Chinese equity market or dismal oil prices.
But the storms blowing in from offshore have ruined the Trudeau government’s honeymoon. Morneau now has to craft a budget that makes some hard choices. Namely, which promise is he going to break?
THE ECONOMY HAS NOT PERFORMED AS WELL AS PREDICTED IN THE LAST BUDGET, BUT THE SITUATION IS NOT WITHOUT HOPE. — FINANCE MINISTER BILL MORNEAU