Liberal fiscal plan includes three years of ‘modest’ deficits

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The Liberal Party is planning for a razor-thin surplus in the final year of a four-year mandate, if elected in October, based in part on shrinking the contingency fund and finding $3-billion a year in ongoing spending cuts.

The 15-page fiscal plan was released on the weekend and provides new details on the Liberal pledge to boost economic growth through a significant increase in infrastructure spending, which would be partly paid for by running three years of what Liberal Leader Justin Trudeau describes as "modest" deficits. The report provides specific bottom-line numbers and breaks down the specific sources of revenue and spending.

A Liberal government would forecast a deficit of $9.9-billion in the 2016-17 fiscal year, followed by a $9.5-billion deficit in 2017-18, a $5.7-billion deficit in 2018-19 and a $1-billion surplus in 2019-20.

The Liberals are the only major party forecasting deficits. The Conservatives and NDP are promising to balance the books every year. Ottawa ran a $1.9-billion surplus in 2014-15 after six years of deficits.

The Liberals are counting on $3-billion annually in cuts to programs and tax breaks by the fourth year of a mandate, a figure equal to roughly 1 per cent of such expenditures. They have not provided details, saying the precise cuts would be determined in an ongoing review.

"I don't think people will feel these cuts because you look for things you can cut without short-term damage where you don't lose people's jobs," economist Mike McCracken said Sunday. "Governments are always going to take a look at existing programs when you're new and have to decide what your priorities are."

Mr. McCracken said the Liberals have also promised to scrap the plan to purchase F-35 fighter jets and could save considerable money on that decision.

Rhys Kesselman, a public-policy professor at Simon Fraser University, gave the Liberal plan high marks for its detail and consistency and for relying on cautious assumptions about economic growth. He said that, given the size of the federal budget, the cuts "should be easily achievable without goring too many oxen."

Conservative and New Democratic Party MPs say the Liberal plan has a $6.5-billion hole – the amount to be saved over four years under program review.

Liberal candidate and former finance minister Ralph Goodale said the Liberal plan will create jobs and economic growth. While deficit spending increases the size of national debt in dollar terms, Mr. Goodale stressed that the debt will actually shrink over that time when measured as a percentage of Gross Domestic Product.

"The objective that we are putting forward in this four-year plan is investment in people, jobs, growth and fairness to make this economy bigger and stronger and put the country in a position to balance the books on a durable basis for the long term," Mr. Goodale said. "Note in the meantime, the debt-to-GDP ratio will be going down every single year. That is one of the most important fiscal anchors you can have so that the country's credit rating in effect will be improving every single year."

The Liberal accounting includes two key differences from the practice used in the Conservative government's April budget.

The Liberals argue that the April budget's revenue forecasts are now out of date in light of lower-than-expected economic growth. The Liberal numbers are instead based on July numbers from the Bank of Canada and the Parliamentary Budget Officer. This decision shaves $4.9-billion in revenue over four years compared with the assumptions in the budget.

However, the Liberals are also suspending the practice of including a contingency fund in the budget forecasts for the next three years. It will bring back a contingency of $1-billion in the final year, which the party is also booking as a surplus. Without including the contingency, the Liberal platform projects a budget that balances exactly that year, with neither a surplus nor a deficit.

In contrast, the April budget included contingencies of $1-billion a year for the next two years, followed by a $2-billion contingency in 2018-19 and $3-billion in 2019-20.

Tax credits, officially described in government documents as "tax expenditures," are a popular policy tool of the federal Conservatives, who have introduced a large number of such credits, including breaks on tools for tradespeople and breaks for volunteer firefighters. The category also includes tax breaks for workers who are compensated with stock options. Mr. Trudeau promised a new tax expenditure during the campaign that would allow teachers to claim a credit for the cost of school supplies.

The Conservatives say the Liberal pledge to find $6.5-billion primarily by reviewing and ending some tax expenditures essentially amounts to new tax increases that have not yet been defined. The NDP referred to the Liberal plan as one of deficits and austerity.

Conservative candidate Pierre Poilievre said Saturday that the Liberal plan will ultimately mean higher taxes.

"The Liberal platform is the most expensive of all three [main] political parties," said Mr. Poilievre, adding the lack of detail from the Liberals on the $6.5-billion should be worrying to taxpayers.

Former parliamentary budget officer Kevin Page told The Globe and Mail that he thought the Liberal plan was "a good document" both in terms of fiscal transparency and promoting growth.

He said he agrees with the view that now is a good time to borrow for infrastructure spending given today's low interest rates.

With a report from Shawn McCarthy