Trudeau should bend his promises
Economic instability: Fiscal reality could curb PM’s plans
Could Bob Rae have won a second term as Ontario premier if he’d made tougher, smarter choices early on? It’s distant history — yet maybe still instructive, considering the rapidly narrowing set of fiscal options on offer for Prime Minister Justin Trudeau’s new government.
“Who do we disappoint next and how soon?” wasn’t how this was supposed to go. But it’s where the Liberals are, rather suddenly. The trick will be in whether they can identify which bad outcome is least harmful, not primarily to the party and its reputation, but to the country.
Here’s the bad news, in broad strokes: A promised year-one deficit of $10 billion, which was already looking porous due to a suddenly discovered $4.4-billion hole in the previous government’s fiscal projections, now looks set to grow by an additional $1.2 billion. That’s because — wait for it — the one per centers who’ve been asked to pay “a bit more,” via a new marginal tax rate of 33 per cent on annual income above $200,000, are now considered likely to take steps to avoid said bit — something that can be done entirely legally, and was entirely predictable.
At the same time, the promised 1.5 per cent reduction in the marginal rate on income between $45,000 and $90,000, is now projected to cost the Treasury more than expected. The upshot is an inaugural deficit we should expect will be closer to $20 billion than $10 billion. This is, mind you, in an economy that grew 2.3 per cent in the third quarter of 2015. Should growth soften, stop or move into reverse, causing an upward spike in social welfare costs and a further slump in tax revenue, the deficit will, of course, climb higher still.
Making matters worse, the price of crude oil has slumped below $40 a barrel as the Organization of Petroleum Exporting Countries continues its policy of driving higher-cost North American crude off the market. This means even these latest projections are stitched together with wishes. Finance Minister Bill Morneau, welcome to Joe Oliver’s world. Somewhere in Calgary, perhaps in the café at his local bookstore, Stephen Harper is enjoying a breakfast roll and chuckling cruelly.
Now back to Rae, circa 199091 — or, for the sake of broadening the argument, Jean Chrétien and Paul Martin, circa 1993-94. In both cases the campaigns that won them office were reformist and expansive. And in both cases, they had to very soon trim their sails to match difficult economic circumstances. But did they move quickly enough? Then-Liberal PM Chrétien and finance minister Martin, though facing a debt-to-GDP ratio that was spiralling out of control towards 70 per cent, didn’t get serious about cutting spending until their famous deficit-smashing budget of 1995. Rae waited until the 11th hour — too late for his re-election hopes — to introduce his Social Contract, a program of spending cuts predicated on Ontario public service unions pitching in for the greater good. They declined, handing the province to Conservative Mike Harris, who proceeded to do to the bureaucracy what the Visigoths did to Rome.
Chrétien and Martin, of course, were re-elected with a second majority in 1997 — because, by then, their earlier harsh medicine was just beginning to bear fruit. Unlike Rae, they’d made the hard, but correct, choices early enough — just barely — to allow the corresponding political sting to fade, and economic seeds to bud, by election time.
Where’s the parallel today? Simply put, Trudeau and Morneau could curb some promised new federal spending immediately, rather than two or three years in, when doing so will surely be politically tougher, because of accumulated baggage and the proximity of another election.
Specifically, they could ratchet back some of the nearly $10 billion a year they’ve promised to spend on “infrastructure investment.” They wouldn’t need to cancel the doubling of the Conservatives’ $65-billion, 10-year infrastructure plan to $125 billion — only delay some of it. “Social infrastructure” and “green infrastructure” were painfully vague propositions to begin with. Cut the annual outlay in half, spend what’s left on patching up decaying overpasses in, say, Montreal, and bank the rest. Doing this might not get them back to the promised deficit of $10 billion — but they’d be considerably closer to the mark than they are now.
There are a couple of good arguments against doing what I’ve just proposed. One is that Canada’s debt-to-GDP ratio today is just above 30 per cent, a far cry from the nosebleed level in the 1990s. Another is that the Trudeau Liberals campaigned and won on a platform of borrowing to fund infrastructure spending. Surely curtailing this, for any reason, would be deemed a deal-breaking betrayal? The opposition would smell blood, close in and seize “sunny ways” by the throat.
But here’s the thing: The opposition will smell blood regardless. The Liberal Party benefited for years, especially in Ontario, from its reputation for fiscal probity. This is one of Trudeau’s two emerging weak flanks, the other being security. Shoring it up will get no easier as time passes and economic shocks mount, as they do. It will only get harder.