In plotting a path for containing Canada’s post-pandemic debt and deficits, the federal Liberal government has embraced the route over which it has the least control. It might ultimately prove to be a wise course. But it’s certainly not a low-risk one.
Monday’s budget features the second-largest deficit in history – $154.7-billion in 2021-22 – exceeded only by the estimated $354.2-billion racked up in the COVID-riddled fiscal year that just ended last month.
It boasts a new three-year, $101-billion spending package aimed at propelling the economy out of its pandemic blues. It features a national child-care plan that promises to permanently add more than $8-billion to Ottawa’s annual program spending commitments. It doesn’t propose any major tax increases to pay for all of this.
Yet the budget also recommits to cutting the deficit and reducing the federal debt as a share of gross domestic product. In essence, this government is going to try to spend our way out of our deficit problems.
The government is betting that its spending on things such as child care, education, small-business investment incentives and innovation adoption will increase the country’s capacity for economic growth – which, in turn, will increase the tax base to pay for it all.
“This is a budget that invests in growth. The best way to pay our debts is to grow our economy,” Finance Minister and Deputy Prime Minister Chrystia Freeland said in her prepared budget speech to the House of Commons Monday.
She may be right. Economists have been saying for years that Canada needs to unlock productivity and expand its labour force if it is going to get out of a low-growth rut that looks likely to only get deeper as the country’s population ages. That growth is essential if governments of all levels are going to maintain services without descending into a debt spiral. Ultimately, a more robust economy may be the only true path to the country’s long-term fiscal sustainability.
Nevertheless, this is a major departure from our traditional approaches to fiscal management. We’re stepping into an abyss. The strategy puts the restoration of fiscal stability in the hands not of the government’s own tax collectors and cheque-writers, but in a broader economic landscape over which government has only limited influence – and, frankly, not the greatest track record in shaping.
We should note that, at least on paper, the government’s ambitions on this brave new path are modest. Indeed, mainstream fiscal thinking even a few years ago might have struck that word “modest” and replaced it with “irresponsible.” Talk of balancing the budget – which this very government promised when it was first elected in 2015 – is nothing but a distant memory.
Today’s version of Liberal fiscal responsibility is to whittle the relative size of the deficit back to pre-COVID levels five years from now, and to reverse the growth of debt relative to GDP, if only a little. Its debt-to-GDP target for 2025-26 of 49.2 per cent is no better than it is today and far above the pre-COVID 31 per cent.
By that time, the annual cost of servicing that debt will be nearly $40-billion, consuming 9 per cent of government revenues all by itself. Beyond that, there are no specific promises.
What the government now calls “prudent and sustainable” is in a very different fiscal orbit than it was even a year ago.
But it’s also notable that the GDP assumptions built into this budget do not include any improved growth trajectory stemming from the government’s ambitious investment plan. If the programs laid out in the budget are effective at all, then the deficit and debt projections over the next few years could prove quite conservative. The government may actually be setting itself up to overdeliver.
And we can say, with considerable certainty, that the centrepiece of the strategy – the national child-care plan – will deliver strong economic dividends. The entire country has seen the impact of universal low-cost child care in Quebec, which has operated its own provincial plan for nearly a quarter-century. The program has been instrumental in increasing female labour-force participation and served as a catalyst for renewed economic growth.
The model has already been test-driven in one of the country’s largest and most diversified economies and has proved its worth. Ms. Freeland talked Monday about a permanent boost of 1.2 per cent in annual GDP from a national child-care plan alone. That’s roughly $25-billion a year.
Other big-ticket measures, such as incentives for small-business capital investment and technology adoption, and a major push to support green technology, don’t have the same degree of certainty. In theory, they should absolutely support the building blocks for growth. But whether those investments can and will be delivered efficiently, to realize the productivity-expanding returns that will justify their costs, is a considerable leap of faith.
Ms. Freeland argued in a news conference Monday that her government’s investment plans have the potential to produce the same kind of economic expansion fuelled a generation ago by the North American Free Trade Agreement. But unlocking that growth is not nearly the slam dunk free trade was – and it’s a much bigger bet of taxpayers’ money.
If it works, we may indeed open a path back to greater prosperity and long-term sustainability of government finances. If it doesn’t, we may have a lot of trouble getting this debt genie back in its bottle.
The Globe and Mail
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