The Liberal government has been talking for years about the virtues of fiscal anchors in its budget plans, without ever actually adopting anchors of any substance. It talked about fiscal discipline, without ever committing to any.
Until now. The government’s fall economic update, released Tuesday, introduced a set of “fiscal objectives” that place firm boundaries around its budgeting over the next few years.
The government committed to keeping the deficit for the current fiscal year (ending March 31, 2024) “at or below” its latest projection of $40.1-billion. Next, it promised to lower the debt-to-GDP ratio in 2024-2025, and keep it “on a declining track thereafter.” Finally – and this is the big one – it pledged to get the budget-deficit-to-GDP ratio below 1 per cent by 2026-2027, and keep it there. (It’s 1.4 per cent now.)
The government isn’t calling them “fiscal anchors,” because it likes to pretend it already had a fiscal anchor, in the form of a promise to lower the federal debt-to-GDP ratio “over the medium term.” But these commitments fit the definition of an anchor much more than that vague aspirational pledge does. Crucially, they have measurable numbers and time frames attached to them. If the government sticks to them – a pretty big if, given the Liberals’ track record – this will anchor future budgets in more prudent, healthy and sustainable territory.
It’s welcome, and long overdue. It’s a shame that this government hadn’t gotten serious about fiscal anchors at least two years ago – when the economy had largely recovered from the damage of the COVID-19 recession, inflation was a fast-growing concern, and the government was still talking vaguely about “fiscal guardrails” for ending pandemic stimulus spending. If it had, we might have averted two years of pouring fiscal fuel on an already highly flammable inflation situation.
But this government has, frankly, avoided its fiscal discipline to firm targets throughout its eight years in office.
Prior to the election of late 2015, the Conservative government of Stephen Harper had spent several years operating under a clearly defined anchor: Eliminate the deficit by the 2015-2016 budget year. The commitment resulted in five straight years of shrinking deficits, effectively reaching the goal in 2014-2015 – a year ahead of schedule – when the budget shortfall was a negligible $600-million.
The Liberals were elected on a promise of small, temporary deficits – “less than $10-billion a year” – chiefly to pay for expanded and long-overdue infrastructure investments. Yes, an explicit anchor – but one the Liberals abandoned almost immediately. The deficits in its first two full budget years were $19-billion. The government’s first budget, in the spring of 2016, contained no specific deficit- or debt-related anchors, only the non-specific promise of a lower debt-to-GDP ratio a few years down the road. Even that went up in flames when the COVID-19 pandemic hit.
Emerging from the pandemic’s massive emergency spending, budgets reverted to those same pledges about aiming for a lower debt-to-GDP. Without being bound by dates or targets, it’s the sort of thing that the government can set aside when it’s not convenient – as it has for this year and next, when that debt ratio is projected to inch up.
The new anchors, on the other hand, have some weight to them. Though maybe not as much as critics might have hoped. The government hasn’t set the bar terribly high for itself.
The deficit-to-GDP commitment of below 1 per cent, for instance, amounts to a pledge merely to return to what, prior to the pandemic, was normal. In the three full budget years before COVID-19, the deficit-to-GDP ratio averaged 0.8 per cent. And the government isn’t promising this right away, but beginning three fiscal years from now.
Until the government proves it can get there and stay there, this will be nothing more than a paper anchor. Given this government’s track record, the fact that this goal kicks in three years from now is cause for skepticism.
In 2015, the Liberals promised that they would return the budget to balance by 2019. In the 2019 budget, the government projected that its deficit would be under $10-billion, or 0.4 per cent of GDP, by this year. By the 2022 budget, that under-$10-billion milestone had been pushed back to 2026-2027. A year and a half later, this new fiscal update has it taking until 2028-2029 to get under $20-billion, never mind $10-billion.
Yes, there was a huge, expensive global pandemic that obliterated budget plans for a few years. Nevertheless, the Trudeau Liberal government has a history of shifting its deficit-reduction goalposts.
It would be a big help – especially for the Bank of Canada, which has been fighting inflation alone, with fiscal policy too often swimming in the opposite direction – if the government could find the spine to keep these promises. But even the efforts to restrain its spending over the next couple of budget years – when its help is most needed in the inflation fight – come off as half-baked.
The fall update shows that program spending in the current year will grow a thin 0.8 per cent this year (helpful), but that’s offset by a bounce-back in 2023-2024 of 5.6-per-cent (unhelpful).
That kind of one-foot-in, one-foot-out approach just won’t do anymore. The fiscal anchors that the government has unveiled will help sharpen the focus. But only if the government develops the discipline to live up to them.