No need for Liberals to go quite so deep into the red

Other options: Financing new spending out of cuts to existing programs would have been more responsible than a $30B deficit

Let us review the case for the budget the Liberals have just unveiled. Canada’s economy, on this view, has been struggling under the yoke of years of Conservative austerity, public services deliberately starved of funds by years of Conservative tax cuts.

On the other hand, Canada’s public debts are modest, by international standards, and interest rates are low. Therefore the government has both the opportunity and the obligation to borrow now, to invest in the kinds of public infrastructure that will stimulate economic growth.

Even if the resulting deficits are larger than advertised in the last election, this is what Canadians voted for. Any other course would not only have required the government to impose deep and damaging cuts in spending, but to break important campaign promises. All of these points have been in heavy rotation since Tuesday. Should any one of them prove false it would greatly weaken the government’s case. In fact, all of them are.

To the extent that economic growth has been sluggish over the last decade, it has had little to do with domestic factors and everything to do with the effects of, first, a worldwide financial crisis (200809) and its aftermath, and second, a worldwide collapse in the price of oil (2014-15).

Certainly Conservative “austerity” had nothing to do with it. Of the 10 biggest spending years in Canadian history, adjusting for inflation and population growth, nine occurred under the Conservatives. The cuts in their last years, while real, were only from the alltime record high to which they pushed spending in 2009-10. Even in proportion to gross domestic product, spending was higher over the Conservatives’ decade in power than the previous one, under the Liberals: 13.8 per cent, on average, versus 12.8 per cent.

So while it’s true that Conservative tax cuts, notably the two-percentage-point cut in the goods and services tax, did reduce federal revenues — from roughly 16.5 per cent of GDP to 14.5 — it’s not true that this imposed any undue constraint on spending. Had the Conservatives merely kept growth in spending to roughly three per cent per year, enough to cover inflation and population growth, spending today would be nearly $30 billion lower than it is, leaving the Liberals ample room to increase spending without going into deficit.

Is there room to borrow instead? Yes, if you look only at the federal debt. The ratio of federal debt to GDP, at 31 per cent, is not far off its pre-recession low, and compares favourably to that of most developed nations. Servicing the debt, with interest rates at historic lows, now costs just nine cents of every tax dollar, down from 38 cents at its 1991 peak. But the federal debt is only part of our overall debt level. The provinces collectively have debts very nearly equal to the feds, bringing the combined federal-provincial debt closer to 60 per cent of GDP — 50 per cent, if you net out assets held by the Canada and Quebec pension plans. And it’s the provinces which will bear the bulk of the costs of population aging, principally in the form of higher health-care spending.

Given the scale of the fiscal challenges facing the provinces in the coming decades — there are credible projections that one or more of them may eventually be forced to default on their debts — the very last thing Ottawa should be doing now is weakening its own financial position. It would be one thing if the $113-billion it plans to borrow over five years was to be invested in the sort of productive assets that would pay off over the longer term in higher economic growth and more revenues.

But as is now becoming more widely recognized, only a very small proportion of the spending the Liberals have planned could conceivably be described in such terms. Of the nearly $40 billion in new spending the current government has planned over the next two years, I count $2.5 billion for public transit, $1 billion for “accelerating federal infrastructure investments,” $1.8 billion for “strategic infrastructure investments at post-secondary institutions,” $260 million for “existing infrastructure programs,” and … not much else.

That’s barely a seventh of the total, with no indication of what if any return the government expects on these “investments.” The rest is sprayed at a constellation of social and cultural concerns, from child care to employment insurance to the CBC, many of them worthy, but all of them more in the nature of consumption than investment — the public finance equivalent of borrowing to buy the groceries.

It’s true the budget’s revenue projections have been heavily sandbagged: consensus growth forecasts are discounted by an enormous two percentage points of GDP. But it’s also true that much of the spending the Liberals have promised — a new health accord with the provinces, enacting all 94 recommendations of the Truth and Reconciliation Commission, and so on — has yet to be factored in.

Is this what Canadians — 39 per cent of them, that is — voted for? If, as has been suggested, nobody cares the deficit is three times what the Liberals promised, then why did they promise it? Presumably their polls were telling them the voters they were targeting were comfortable with $10-billion deficits, not so comfortable with numbers larger than that.

There has been no great falling off of revenues since the last budget: in fact, for fiscal 2016 they came in slightly higher than forecast. Had the Liberals stuck to the spending track laid out in that same budget — financing new spending out of cuts to existing programs — the deficit would be a nonissue: perhaps $10 billion this year, half as much in subsequent years. Or suppose they had phased in their program gradually, rather than jumping in all at once.

There are any number of ways they could have kept their promises, in other words, without running $30-billion deficits. These are debts of choice, not of circumstance.