Barely 3.5 per cent of Canadians named debt and deficits as the most important issue of national concern in the most recent polling done by Nanos Research. That trails the environment (21.7 per cent) and jobs/economy (18.2 per cent) by a hefty margin, and in fact, the number has never exceeded 10 per cent during the last five years of Nanos surveys.
Voters have lost their taste for government austerity since our last serious Canadian debt and deficit problem. The last time things approached a crisis was a quarter century ago, now a distant memory. Nearly half of the current voting-age population was too young to vote then; 11 per cent hadn’t even been born yet.
But there could be another reason Canadians tolerate deficits now: a personal financial squeeze that has many feeling that they’re falling behind.
Despite a job boom and an unemployment rate near 40-year lows, wage growth has barely kept up with inflation during the past several years. Meanwhile, rising real estate prices are making homes less affordable.
“A lot of Canadians don’t feel like they’ve been getting ahead,” says Craig Alexander, chief economist at Deloitte Canada. “And because they don’t feel like they’re getting ahead, they’re looking for governments to offer them more.”
Federal parties have responded with promises of higher after-tax income for families and spending more on key priorities, with the understanding of running deficits. Canadians seem to be saying they’re okay with that.
But here are seven things to think about that should give us pause about deficits.
1. It’s not all about federal deficits. Provincial debt is ballooning
Justin Trudeau’s Liberals like to gloat that Canada has the best balance sheet among the Group of Seven countries. Not true.
That statement leaves out the provinces, whose combined debts, at slightly more than $700-billion, are roughly equal to Ottawa’s debt. That has to be considered in the overall picture of Canada’s financial health, because it’s the provinces that are responsible for big-budget services such as education and health care – services whose costs will only explode in the years to come.
Canada’s aging population is going to put a lot of pressure on the medical system, and provincial governments don’t have the fiscal capacity they need, Mr. Alexander says. “I’m worried that health care is going to turn into a black hole that consumes all provincial resources,” he says.
Canada has the biggest portion of subsovereign debt among a dozen other countries with triple-A credit ratings, according to Moody’s Investors Service. More than half of all general government debt in this country (about 58 per cent) is at the regional and local level, pushing up Canada’s gross government debt-to-GDP ratio to almost 80 per cent, Moody’s says. And the financial markets and credit agencies have long believed that in a crisis, the federal government would backstop any provincial debt – so, it’s overall government debt that really matters.
Total government debt by level of
government
As a percentage of GDP (2018)
Federal
State/provincial and local
U.S.
15%
78%
Canada
33%
46%
Germany
32%
29%
Netherlands
49%
3%
Australia
31%
10%
Denmark
19%
15%
Switzerland
13%
14%
THE GLOBE AND MAIL, SOURCE: MOODY’S INVESTORS
SERVICE
Total government debt by level of government
As a percentage of GDP (2018)
Federal
State/provincial and local
U.S.
78%
15%
Canada
33%
46%
Germany
32%
29%
Netherlands
49%
3%
Australia
31%
10%
Denmark
19%
15%
Switzerland
14%
13%
THE GLOBE AND MAIL, SOURCE: MOODY’S INVESTORS SERVICE
Total government debt by level of government
As a percentage of GDP (2018)
Federal
State/provincial and local
U.S.
78%
15%
Canada
33%
46%
Germany
32%
29%
Netherlands
49%
3%
Canada has the largest
portion of sub-sovereign debt
among Aaa-rated peers
Australia
31%
10%
Denmark
19%
15%
Switzerland
14%
13%
THE GLOBE AND MAIL, SOURCE: MOODY’S INVESTORS SERVICE
When all debt is included, Moody’s says, Canada has one of the highest debt burdens among its peers – and one of the least affordable. The ratings agency estimates that Canada’s interest payments this year equal 7.8 per cent of its revenue and 3.1 per cent of its gross domestic product, the second-weakest in its cohort behind only Italy.
Credit agency Fitch Ratings warned Ottawa in March that sustained deficits will leave Canada more exposed in a recession, and that its combined federal and provincial debt is close a level that’s “incompatible” with a triple-A rating.
Still, Canada has some things going for it. Its credit rating is the best there is, according to Moody’s metrics. Its power to fund its debt with its still-growing economy has improved in the low-interest-rate environment, the ratings company says. And the country’s large, independently funded public pension funds – the Canada Pension Plan and the Quebec Pension Plan – effectively shield the government’s finances from rising future pension costs as the population ages, setting Canada apart from many other countries.
“Every generation has to learn about the consequences of excessive borrowing for themselves,” says political scientist and commentator Mark Milke, author of Tax Me I’m Canadian.
2. Big government is making a comeback.
The Trudeau government has done more than just reintroduce the notion of routine deficits. It has re-introduced big government – or, at least, bigger government. The spending proposals in its campaign platform would give the government its biggest non-recessionary footprint on the economy in 25 years.
The typical gauge for a government’s size is its program spending as a share of gross domestic product. That shrank dramatically during the deficit-slashing era of the mid-1990s – from more than 16 per cent when the Chrétien government took office in 1993, to less than 12 per cent in the early 2000s. It remained between 12 per cent and 13 per cent during Stephen Harper’s prerecession years.
But the Liberals have reversed that course – modestly, but unmistakably – since taking office in 2015. And their campaign spending proposals would take it further.
In last spring’s budget, the Liberal government envisioned program spending peaking in the 2018-19 fiscal year at 14.6 per cent of GDP, declining to 14.3 per cent this year and continuing to gradually decrease to 13.8 per cent by 2023-24. But under this Liberal platform, program spending now looks set to rise to 14.7 per cent of GDP in 2020-21 and changing little throughout the next mandate; by the 2023 election, it would still be at 14.5 per cent.
Outside of a couple of years around the Great Recession – when the Harper government injected a massive fiscal stimulus – Canada hasn’t a run of sustained spending-to-GDP that high since the mid-1990s. And unlike Harper’s recession stimulus, these aren’t temporary measures.
“Much of [the Liberals’ increased spending] has gone into social spending – which is an annual thing, and it becomes entrenched,” says Joe Oliver, who, as finance minister in the Harper government, was the last finance minister to present a balanced budget, in 2015. “There’s nothing harder in government than cancelling a program – it’s excruciatingly difficult.”
And that’s even if governments stick to their plans, which they don’t. According to a study released over the summer by the C.D. Howe Institute, Canada’s federal, provincial and territorial governments routinely overshoot the targets they set in their annual budgets. Since 2000, they’ve spent $91-billion (some $2,500 for every Canadian) more than they budgeted and raised $142-billion (almost $4,000 for every Canadian) more than they budgeted.
Without the rigour of a zero-deficit framework, spending can quickly snowball, C.D. Howe president Bill Robson says. “When governments start to spend very freehandedly, pretty soon you start getting stories about people expensing packets of gum and $15 glass of orange juice or subsidies to profitable companies and handouts that appear to be very calibrated to swing ridings. Over time, I think people’s tolerance for that is diminished."
3. Just how big a debt burden are we taking on?
One key factor that makes deficits and debts more manageable today is also, conversely, what made them so dangerous in the 1990s: interest rates.
In 1991, the interest rate on 10-year Government of Canada bonds was more than 11 per cent. As a result, the cost of servicing federal government debt – of making the interest payments annually – was a whopping 6 per cent of GDP. In the mid-1990s, Ottawa was spending more than 30 cents out of every dollar it collected in revenue just to pay the interest on its debt.
Today, with 10-year bonds at just 1.25 per cent, federal debt-servicing costs are a shade over 1 per cent of GDP. The interest on government debt consumes just 7 per cent of the budget.
Many economists argue that such low borrowing costs not only make deficits and debt easier to bear – they may even make them desirable. This could be the best time in history for governments to borrow to finance long-overdue infrastructure projects.
"This is a very good time to do infrastructure spending. It’s not just the short-term interest rates that are really low, but the long-term interest rates are extraordinarily low. You can do a long-term project and you know you’re going to be locked into a very low-interest-rate environment,” says Queens University economist Don Drummond.
The other mitigating factor is that our debt-to-GDP ratio is manageable. Indeed, debt-to-GDP has emerged as the preferred benchmark. As long as the economy is growing enough, the conventional wisdom goes, we’re alright managing our debt.
Kevin Milligan calls it “the moral foundation” of debt economics.
“Should we be leaving debt to our kids?” the University of British Columbia economist asks. “The answer is ‘So long as debt-to-GDP is going down, we’re not.'"
The context is much different now than it was in the 1990s, Mr. Milligan says. Canada would need to add $800-billion of debt and see a quadrupling of interest rates to be back to the crisis of those years, he adds.
That’s not to say that there isn’t merit in maintaining fiscal discipline. Runaway deficits are to be avoided, Mr. Milligan says. And he acknowledges there’s a danger that Canada’s future governments will move the goalposts further out so that a stagnant debt-to-GDP ratio might be deemed acceptable, or even increases would be tolerated.
“You want to make sure that doesn’t get out of control. But we need to look around us at the environment we have and recognize that it’s not getting out of control.”
If you accept the notion that going into debt is fine, however, the next question is how much borrowing is okay. And the answer isn’t clear. Moody’s does not have a specific threshold it considers dangerous, for example.
“One of the great failings among many of the economists in public finance is we’ve never nailed down what is an appropriate level of debt-to-GDP ratio,” Mr. Drummond says.
4. We’re spending to buy votes, not promote growth
The 2015 Liberal platform promised short-term deficits that would primarily be used to pay for increased spending on infrastructure. “Now is the time to invest,” the party promised. Yet, in government, the Liberals struggled to meet their own infrastructure spending targets. Government-wide program spending still rose though, to $330-billion last year – a nearly $50-billion spike from the year the Liberals came to power. The size of the public service grew 12 per cent during that time.
For 2019, the Liberals and the Conservatives are both promising across-the-board tax cuts that would reduce federal revenues by about $6-billion a year. The Conservative campaign followed that up with a long list of more targeted tax cuts aimed at seniors, parents, homeowners and others. The Liberals are also targeting the same groups with promises of new tax breaks and benefits.
Neither party has so far announced major new infrastructure spending, although large long-term spending increases on infrastructure are already part of federal spending plans approved in recent Liberal budgets. The Liberal platform promises $56.9-billion in new spending and tax cuts over four years, to be paid for with $25.4-billion in tax increases and spending cuts as well as $31.5-billion in new debt resulting from larger-than-planned deficits. The Conservative platform has not been released, but the party says it can cut taxes and still balance the books within five years.
The question is whether any of the spending will build the economy, improve productivity and create the conditions for robust growth.
Former deputy finance minister Scott Clark says deficit spending can be justified if it is a true “investment” that produces long-term benefits, such as spending on infrastructure or education. Yet, he’s been struck by the speed, volume and size of the Liberal and Conservative campaign promises, and says they do not fit that bill.
“These are just attempts to buy people off,” he says. “I don’t think of tax cuts as investments.”
Queens’ Mr. Drummond shares the view that deficit spending should benefit the younger Canadians who will inherit that debt.
“You still, at a minimum, have to justify passing on a burden to a future generation: Are you generating a benefit?” he says.
5. Cutting now could cost us more later
When people talk about investing in things that pay off for the economy and generate economic growth, they often mention hard infrastructure such as roads and ports. But economist Jesse Hajer of the University of Manitoba says the notion of “social infrastructure” is just as important if not more so. By that he means investing in reducing poverty, in things such as enabling the latent potential work force in Canada.
He gives the example of Manitoba’s Indigenous community, which has been socially and economically excluded and underrepresented in postsecondary training and work. Helping them integrate into the work force is a good thing to go into debt for, he says. They are investments that pay off in the long run.
The bottom line is that it’s dangerous to look at deficits in purely ideological terms. Borrowing is not inherently evil, he says. You have to look at what you get for the spending.
If governments are going to reduce the deficit, they either have to raise taxes or cut social programs. And those who advocate for a lower deficit typically reject tax increases, he says.
“So it’s programs that get cut." Mr. Hajer says. "And there’s very little discussion about what are the costs associated with taking that programming away. Like what are the secondary impacts on the economy of people not having access to affordable childcare or people experiencing a diminishing quality of education?”
“It’s a false narrative that you’re saving money by cutting these services,” he adds.
Marguerite Mendell, an economist at Concordia University in Montreal, says the context underpinning how we think about deficits has also shifted. Ottawa is no longer fighting high inflation or unemployment – or both at once. So, the government can make more careful choices about where it spends.
“The question one has to ask is what are they spending on?" Ms. Mendell says. "And if you’re going to engage in public spending for public purpose, I have no problem with that.”
6. This is not what Keynes had in mind
The legendary British economist, John Maynard Keynes, believed governments should use spending to lean against the highs and lows of the business cycle, thus smoothing the bumpy economic path. Although this Keynesian approach to fiscal policy has had its critics over the years, it is generally at the foundation of sound government budgeting the world over.
The idea is that when the economy is slumping or in recession, governments should increase spending, even if that means more borrowing and deepening deficits, to stimulate economic activity. When the economy is strong, governments can ease off the spending throttle.
The proposals from the leading contenders in this campaign appear to fly in the face of Keynesian logic. Both the incumbent Liberals and, to a slightly lesser extent, the Conservatives, look prepared to maintain or even expand deficits in the near term, at a time when the Canadian economy is running near full capacity.
Critics worry that deficit spending now will use up valuable fiscal ammunition that could be needed to aid the economy in a downturn.
The enviable fiscal health restored by Ottawa in the 1990s gave the Harper government the flexibility it needed for major stimulus spending in the financial crisis and Great Recession of 2008-09. Canada emerged without the kind of troubling debt load that saddled other countries who went into the recession with less healthy balance sheets, allowing it to avoid harsh austerity measures that hampered the recovery in other parts of the world.
Even if the government felt it couldn’t afford a major stimulus effort when the next recession hits – a decision that would certainly deepen the damage and slow the recovery – economists say that deficits would balloon regardless. Tax revenues would go down as the economy slowed, while expenses would increase in support programs such as unemployment benefits.
“You can move from a $20-billion deficit to $50-billion in a flash,” Mr. Oliver says.
7. If we don’t learn from the past, we’re doomed to repeat the ’90s
When Jean Chrétien’s Liberals took power in 1993, they inherited a country awash in red ink. The federal government had run a then-record deficit of $39-billion the previous fiscal year. Net federal debt was closing in on 70 per cent of GDP, about double where it was just a decade earlier (and more than double where it is today).
The budget that year, tabled by the previous Mulroney government, had a smattering of spending cuts, yet they barely kept up with debt costs. Simply paying interest on the debt was costing the government nearly $40-billion a year and climbing. Those costs alone ensured that the debt kept rising, making the problem worse every year.
Mr. Chrétien and his finance minister, Paul Martin, determined that it was time for tougher medicine.
“The debt and deficit are not inventions of ideology. They are facts of arithmetic. The quicksand of compound interest is real,” Mr. Martin said in his speech presenting the 1995 budget – a radical document that laid the groundwork for the most dramatic financial transformation in modern Canadian history.
They set about a sweeping restructuring and downsizing of the federal government. They slashed program spending by 13 per cent. They reduced the civil service by 55,000 jobs. They cut transfers to the provinces by 30 per cent.
Within four years, the deficit had been eliminated. The success at the federal level spilled over to the provinces, where budget balancing became all the rage during the 2000s. By 2005-06, every province in the country ran a small surplus.
Some observers, such as the Fraser Institute research group, see Canada in danger of repeating the mistakes of the past.
The high government spending and runaway deficits that led to the near-crisis of the mid-1990s are both present today, with warning lights flashing red, the research group says. Canadians, it says, should be worried.
The difference now is that declining labour-force participation is a big headwind to economic growth and government finances while our politicians don’t want to talk about debt. As Mr. Oliver puts it: “It’s tougher to sell prudence than it is to sell goodies.”
Federal government spending a person, adjusted for inflation, increased to a projected $8,804 this year from $7,740 in 2014, according to according to Fraser Institute economists Tegan Hill and Jake Fuss. In 2018, per-person inflation-adjusted spending reached its highest point in Canadian history, the institute says.
“Could small budget deficits turn into bigger deficits in an environment of fiscal complacency? Yes, easily,” says Kevin Page, head of the Institute of Fiscal Studies and Democracy at the University of Ottawa. “We should always be nervous of repeating the bad days."
Nicolas Van Praet
David Parkinson
Bill Curry