As Finance Minister Bill Morneau prepares to table his March 22 budget, the Liberal brain-trust is persuaded that Canadians don't care enough about deficits to punish any government that runs them. Not even one whose fiscal projections have Ottawa seeing red through mid-century.
"You just have a hard time convincing many people in Canada right now that the government's balance sheet is of greater concern than their own," Liberal strategist and pollster David Herle told The Globe and Mail after a Nanos Research poll found that most Canadians see no problem with Ottawa running deficits indefinitely as long as the debt-to-GDP ratio continues to decline.
There are more than a few problems with this attitude, starting with the idea that the government's finances have no bearing on the financial well-being of individual Canadians. If you pay taxes or receive government benefits, Ottawa's balance sheet has a direct impact on your own. Chronic deficits inevitably lead to higher taxes and fewer benefits. Ask Greece.
What's more, projections of the debt-to-GDP ratio are only as reliable as the assumptions they're based on. If population, productivity and economic growth fall even a tiny bit short of those assumptions, radical measures will be needed to put finances back on track. Ask Greece.
In Canada, the net debt of the federal and provincial governments will have increased by $527-billion, or 63 per cent, between 2007 and the March 31 end of this fiscal year, according to a recent Fraser Institute study. Over all, our public debt-to-GDP ratio will have risen to 67 per cent from 53 per cent. That is nowhere near Greece-like levels, but it still leaves us vulnerable to an increase in interest rates or sudden economic shock.
Prime Minister Justin Trudeau's Liberals came to power in 2015 promising to run modest deficits of no more than $10-billion and return to balance by the next election. They quickly blew through that undertaking, with the deficit likely to come in at upward of $20-billion for this fiscal year, and so far no plan to eliminate the shortfall before or even after the next election.
That may change in the budget. Mr. Morneau is under pressure from the business community to establish a clear framework for eliminating the deficit. But if he does, it won't be because Mr. Trudeau and his top advisers believe in it. They are firmly in the deficits-don't-matter camp, along with the Davos crowd that now sees public spending as a substitute for private investment.
Outside of a recession, there is little evidence that stimulus spending works. As Morgan Stanley chief global strategist Ruchir Sharma so persuasively argues in The Rise and Fall of Nations, potential economic growth rates are overwhelmingly a function of population and productivity increases. Both have slowed and will continue to do so. Slow growth is the new normal practically everywhere.
The Trudeau government insists otherwise, with the apparent benediction of a Bank of Canada that points endlessly to an "output gap" that needs closing. Massive infrastructure spending, Ottawa tells us, will help offset weak oil prices. More likely, it will leave us with a costly legacy of underused subway lines and other politically-driven projects that taxpayers will regret.
The prudent course of action would be to balance the books while we can in order to be able to more effectively respond to the next recession when it comes. Instead, the Liberals took the hard-won fiscal dividend the former government produced and squandered it on things like the CBC and reversing a planned increase in the old-age security eligibility age to 67 from 65. Even Mr. Morneau's own economic advisory council rejected that idea as hare-brained in the 21st century. The only area where the Liberals have demonstrated fiscal rigour has been in holding the line on cash transfers to the provinces.
Ottawa does have some low-hanging fruit if it wants to clean house, starting with the micro-targeted tax credits introduced by the Conservatives. But they would likely need to be replaced by across-the-board income tax cuts if U.S. President Donald Trump delivers on tax-reform promises south of the border. Our top marginal tax rates are already an invitation to leave the country.
The focus of the upcoming budget will be on innovation, though no one is holding his or her breath that the Liberals will be able to fix what no government before it has been able to. Canadian business investment in research and development continues to lag our competitors. Perhaps the best idea worth trying is the creation of a "patent box" model that would tax income derived from intellectual property developed in Canada at a lower rate than regular corporate profits.
Still, if Ottawa really wants to create a climate for growth and innovation, its best move would be to start acting like deficits matter.