Feds must get off the deficit train soon

Adaunting new report by federal officials predicts budget deficits far higher, and reaching much further into the future, than Prime Minister Justin Trudeau promised.

Campaigning for election in 2015, Trudeau assured voters he would run “a modest short-term deficit” of less than $10 billion for only three years, returning to a balanced budget by 2019.

But Finance Department staff are now telling us the shortfalls might endure until at least 2051. Worse still, the deficits are expected to peak at a staggering $39 billion in 2036, and remain at ruinously high levels for a further 15 years. During those three decades, the national debt will more than double, to $1.5 trillion.

The apple, it appears, doesn’t fall far from the tree, after all. When Justin’s father, Pierre, took office in 1968, he inherited a small surplus. It didn’t last.

Trudeau Sr. began an epic binge of deficit financing that went on for 30 consecutive years, engulfing seven administrations and both major parties. It was eventually brought to a halt in 1997 by major spending cuts, hefty tax increases and off-loading on the provinces.

What did this exercise in financial futility achieve? Almost nothing. Almost all of the borrowing went to pay interest charges on earlier debt. Scarcely any was used for the intended purpose — to stimulate the economy or improve government services.

And here we are again. How, you might ask, could this possibly happen?

The finance staffers made two key assumptions. First, they foresaw economic challenges ahead as more people exit the workforce than enter it. Over this period, the number of Canadians aged 65 and older will exceed those 15 and under.

Second, they assumed historical growth rates in federal spending would remain unchanged throughout the period.

Both of these premises are troubling. The demographic projections are certainly real. But they were equally evident in 2015 when the prime minister promised a surplus just around the corner.

Yes, oil prices are down, but nowhere near enough to wreak the havoc now predicted.

The second presumption — that federal spending won’t be restrained even as deficits extend beyond the horizon — is also problematic. That happens only if successive governments do nothing to rein in expenditures.

We need to step back here and consider what’s on the table. The idea of using deficit financing as a stimulus is usually attributed to the economist John Maynard Keynes. Writing after the First World War, Keynes proposed this policy as an antidote to the economic turmoil of that era.

Yet there are two basic differences between then and now. First, Keynes never imagined a scenario where deficits would last for three decades.

He believed in balancing budgets over the business cycle — borrowing during a downturn, followed by surpluses during the subsequent upturn. He would turn over in his grave if someone suggested he was advocating what our finance staff now foresee.

Second, the economies of post-First World War Europe were sufficiently ravaged that even modest government borrowing would have a measurable impact. But those times are long gone.

Canada’s gross domestic product today stands at $2 trillion. An annual deficit in the $35-billion range represents 0.0175 per cent of that total — a drop in the ocean.

However, what 30 years of debt financing will do is build pressure on federal programs that must eventually lead to a meltdown — as it did last time around. It might also discourage the business community from investing through fear of a crash.

In summary, the Finance report is nothing short of a disaster scenario — one that must not be allowed to play out.

Has our prime minister the courage to step up and change course? We’ll find out this month when the federal budget comes down.