Skip to main content

Kevin Page and Randall Bartlett, Institute of Fiscal Studies and Democracy, University of Ottawa

Federal Finance Minister Bill Morneau is scheduled to present his fourth economic and fiscal update on Nov. 21. Barring some unforeseen event, it will likely be the Liberal government’s last update before the fall 2019 election. Expect lots of “sprinkles” at taxpayers’ expense in the months ahead. But notwithstanding political pressure related to a coming election, we wish to make the case to use the opportunity to clarify and strengthen federal fiscal policy.

The case for a fiscal policy reset by the federal government is threefold. First, the economic context has fundamentally shifted since the government set out its fiscal strategy during the 2015 election. Second, interest rates are moving higher, and it’s important that both monetary and fiscal policy work together to promote growth and stability. And, third, current federal fiscal policy is largely without a rudder and an anchor. Clear fiscal objectives that promote sound public policy are essential for planning and accountability.

Story continues below advertisement

In the era of “alternative facts,” it is especially useful to examine some real ones. The economy is doing well. The government can take some credit. Year-over-year economic growth is well more than 2 per cent and the unemployment rate is less than 6 per cent. This is not the same environment it was back in the 2015 campaign when the Liberal party committed to modest budgetary deficits to strengthen an economy that had flat-lined. Times have changed, but the government’s fiscal strategy has not, and we continue to pile on debt as a consequence.

With the economy operating at a healthy trend, the Bank of Canada is prudently moving its policy interest rate upward. Mortgage and prime business lending rates are responding in kind. Given the current outlook, many expect the central bank’s policy rate to climb as much as another full percentage point over the next year. Monetary policy will be less accommodating to help keep a lid on inflationary pressures and asset price imbalances. Metaphorically speaking, if the Governor of the Bank of Canada is doing his best to remove the punch bowl from the party, it does not help if our Finance Minister chooses to keep the bar open. As such, now is the time to rein in budgetary deficits.

Current federal fiscal policy does not have a binding budgetary constraint. Policy appears to be largely dictated by a commitment to reduce the debt-to-GDP ratio. In a healthy economy, where nominal GDP is growing upward of 4 per cent annually, this allows the government to add considerable sums to the national debt – about $20-billion a year. But even a comparatively mild recession could blow the federal fiscal ship off course in a hurry. And in good times, with the rate hikes, just the interest on the public debt is now projected to far outpace other expense components, such as the Canada Child Benefit or spending on public infrastructure.

We are not saying that the federal government fiscal policy has been irresponsible to date. A case is easily made that federally budgetary deficits are modest, given the current carry cost of debt is low, as is government debt, relative to other countries. We are saying it is time for a fiscal policy reset, not business as usual.

The time has come for the federal government to set out a medium-term path to budgetary balance or modest surpluses as was the case from the mid-1990s to 2006-07. Bring fiscal policy in line with monetary policy and a strong economy with a set of annual targets for spending and deficit reduction. Enhance transparency on direct program spending. Provide long-term fiscal sustainability analysis with clear assumptions for plans that demand multi-year commitments such as national defence and public infrastructure. This will ensure Canadians are better positioned to debate the merits of corporate tax reductions or a national pharmacare program than they are today.

Report an error Editorial code of conduct
Comments

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • All comments will be reviewed by one or more moderators before being posted to the site. This should only take a few moments.
  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed. Commenters who repeatedly violate community guidelines may be suspended, causing them to temporarily lose their ability to engage with comments.

Read our community guidelines here

Discussion loading ...

Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.
Cannabis pro newsletter