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Illustrations by Kagan McLeod

Konrad Yakabuski is a Globe and Mail columnist.

When it comes to sheer fiscal audacity, the Green Party of Canada is already the hands-down winner of this federal election campaign. By promising more than $60-billion in new spending starting next year, the Greens would inject fiscal helium into the economy, expanding the size of the federal government by one-fifth almost overnight.

What the Greens would giveth, however, they would also taketh away (just not from the same people) by imposing a slew of new taxes, with a view to balancing the budget within five years. Just don’t take that latter promise to the bank.

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Indeed, the Greens are not alone in throwing fiscal caution to the wind during this election campaign. All the parties currently represented in Parliament are vowing big spending increases while expressing either a weak commitment to balanced budgets or no such commitment at all. In today’s Ottawa, “deficit” is not only not a dirty word, it’s practically become a badge of honour, couched in the progressive lingo of “investing” in Canadians.

“We know that a country can’t cut its way to prosperity,” says the 2019 Liberal Party of Canada platform. “Cuts don’t help people. Austerity doesn’t grow the economy. And putting the interests of wealthy people ahead of the middle class is not how you keep a country like Canada moving forward.”

It sounds like the 1970s all over again. How did that happen?

Not long ago, deficits were verboten in Ottawa. After a hard-fought battle to balance the federal budget in the mid-1990s – after two decades of red ink that had driven Canada dangerously close to a debt crisis – no party dared advocate deficit spending. The federal government did go deeply into deficit during the 2008-09 recession, but it was considered a necessary evil to combat the economic downturn. The Conservative government of Stephen Harper returned the budget to balance by 2014. If the parties argued about the timing of spending cuts, they all agreed the goal of a balanced budget was the right one.

By 2015, however, cracks had begun to show in the balanced-budget orthodoxy. During the election campaign, the Liberals vowed to run “modest” $10-billion deficits for two years and return to balance by 2019. (Spoiler alert: They didn’t make it.) This time, however, the party isn’t even paying lip service to balancing the budget. The Liberals seem to have concluded that not enough Canadians care, while their base of progressive voters thinks deficits are cool.

Even the Conservative Party, once the Scrooge of Canadian political parties, has moved away from a hard opposition to deficit spending. The Conservatives do promise to balance the budget, eventually. Just not during the four-year mandate they’re seeking from voters on Oct. 21.

“I am sort of surprised at how fiscal prudence has gone out of fashion these days,” says Paul Boothe, a former associate deputy minister in the Finance and Industry departments during the 2000s. “The current generation of analysts and policy makers don’t seem to understand how hard Canada had to work during the [Brian] Mulroney and [Jean] Chrétien years to get back to balance.”

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To be sure, the parties running in this election have sought, to varying degrees, the imprimatur of the Parliamentary Budget Officer to lend credence to their fiscal plans. But the PBO has issued so many caveats about the high degree of uncertainty surrounding the costs associated with party promises that its analyses must be considered approximate at best, if not entirely moot.

Indeed, the parties’ fiscal frameworks are only as reliable as the assumptions they’re based on. And no party is making the one assumption that may end up mattering most. The odds that the next federal government will have to manage public finances through a recession are rising by the day.

There is a serious risk that the deficits that Liberals once insisted would be small and temporary will become large and permanent. And that the spending promises being rolled out in this campaign will leave Ottawa with a pernicious structural deficit that undermines investor confidence, putting Canada on track for a painful fiscal reckoning similar to what it faced in the 1990s. Yet no one seems to be talking about that on the campaign trail. Maybe they should.

In July, the economic recovery that began in Canada and the United States in mid-2009 became the longest on record. After a decade of rising asset prices, especially in stocks and real estate, almost everyone agrees the party has to end sooner or later.

Historically low interest rates have left consumers with maxed-out credit cards and massive home mortgages. Meanwhile, a global trade war threatens to push many export-dependent economies such as Canada’s over the edge. A process of “deglobalization” has begun that could radically shrink global supply chains and leave every trading nation poorer than it is now. “None of the parties are talking about any of that,” notes Steven Ambler, an economics professor at the University of Quebec at Montreal. “It is difficult in an election campaign to raise the spectre of a recession. But I would give any party that did so points for honesty.”

Indeed, the next federal government could face fiscal challenges greater than those faced during the so-called Great Recession of 2008-09. With interest rates still treading near historical lows, the Bank of Canada has almost run out of ammunition to stimulate the economy. That could put extra pressure on the federal government pick up the slack if the economy falters.

During the most recent recession, the bank chopped its benchmark interest rate from 4.5 per cent to 0.25 per cent. In fact, during every recession since 1980, the bank has cut its key lending rate by more than four percentage points. With its overnight rate currently hovering at just 1.75 per cent, it has far less room to cut. And it’s not clear that zero, or even negative, interest rates would be enough to rebuild investor confidence when private debt levels are already elevated.

Most central banks are in a similar position, leading to a growing consensus among economists that fiscal policy will have to play a much bigger role in combatting the next recession.

This raises questions about whether the Liberal government’s decision to run much larger deficits than it promised in 2015 has left Ottawa with enough fiscal room to manoeuvre when the next downturn hits.

Even if the next federal government did nothing, a recession would lead to a sharp drop in revenues and concomitant increase in spending as automatic stabilizers such as employment insurance benefits rise.

A fiscal stimulus package of the size needed to help kick-start the economy could end up being outside Ottawa’s reach if bond markets begin to worry that Canada has overextended itself with permanent deficits.

“I am disappointed [the Liberals] did not return to fiscal balance the way they promised they would during the last campaign,” offers Mr. Boothe. “I think it was a missed opportunity.”

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The Liberals contend they’ve managed federal finances prudently by keeping the size of the debt stable relative to the size of the economy, or gross domestic product. The federal net debt as a proportion of GDP has declined slightly, to about 31 per cent, since 2015.

Still, that ratio might be significantly lower now had the Liberals stuck to their original plan. Instead, they amassed deficits totalling more than $50-billion during their first three years in office. And the deficit is projected to hit almost $21-billion in the current fiscal year, which ends next March. By then the federal government’s net debt is set to total more than $705-billion, up from about $630-billion in 2015.

The 2019 Liberal platform projects deficits totalling $94-billion during a second mandate – with no mention of what may happen in a recession. Many Liberal promises, such as increasing Old Age Security benefits for Canadians over 75, come with hefty and verifiable price tags. But the party’s projections for revenues from new taxes on luxury goods and multinational technology giants are highly speculative. What’s more, the party platform does not include any projections for spending on a promised national pharmacare program.

The Liberal plan nevertheless projects that the federal net debt-to-GDP ratio would fall to 30.2 per cent by the end of a second mandate. How likely is that? If a recession hits, all bets are off.

By the time the 2008-09 recession hit, the net debt-to-GDP ratio had fallen to 28.2 per cent after more than a decade of budget surpluses under both Liberal and Conservative governments. As a result, Ottawa was able to undertake stimulus spending without raising concerns in financial markets about rising federal debt levels. Having wiped out more than $100-billion of debt between 1997 and 2008, the federal government was free to spend, spend, spend.

Not that the Conservative government of the day was inclined to do so. Throughout the fall 2008 federal election campaign, Mr. Harper stuck stubbornly to his balanced-budget script, even as stock markets cratered and evidence of a severe global recession continued to accumulate.

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Some economists believe the Harper government wasted precious time by resisting pressure from the opposition parties to adopt a stimulus package when it tabled its November, 2008, fiscal update. Instead, Mr. Harper prorogued Parliament to avoid a possible defeat in the House of Commons and waited until the following January to table a $40-billion stimulus package, spread over two years. The federal budget deficit surged to a record $56-billion in 2009-10 alone as Ottawa ramped up stimulus spending while registering a steep decline in tax revenues.

The effectiveness of all that stimulus spending remains a matter of some dispute. Most of the outlays for infrastructure spending occurred after the recession had technically ended, and much of it entailed projects that contributed little to enhancing productivity. Still, those at the centre of the action insist adopting the stimulus package was the right thing to do.

“One of the things we learned in 2009 and 2010 is that it is very difficult to spend a load of money both quickly and intelligently,” says Christopher Ragan, a McGill University economics professor who served as a visiting economist in the federal Finance Department at the time. Still, he believes the stimulus package helped boost consumer and investor confidence, which had been “shattered” at the outset of the recession.

Another lesson of the most recent recession is that, once a government goes into deficit, it can be very hard to stop the red ink. In all, the Harper government ran six consecutive deficits before finally returning to surplus in 2014. The federal debt ballooned by more than $170-billion over the same period, pushing the federal net debt-to-GDP ratio to 34 per cent. If the Liberals had balanced the budget after 2015, the ratio would now stand at about 27 per cent, leaving Ottawa with much more leeway to run bigger deficits during a future recession.

Even so, the Liberal platform says that “Canada now has the best balance sheet in the G7.” That is only true, however, if you leave out provincial government debt, which is substantial and remains a growing concern as the country’s population ages. Indeed, an analysis released last month by Moody’s Investors Service pegs Canada’s overall government debt-to-GDP ratio at 80 per cent. The figure includes federal, provincial and municipal debt and is the one ratings agencies use to compare Canada to other countries, such as the United States, where almost all public debt is issued by the federal or central government. In other words, Canada is not the fiscal top of class the Liberals suggest it is.

“Canada stands out as having one of the least affordable debt burdens among [triple-A] rated sovereign [borrowers] and G7 countries,” Moody’s added, noting that Canadian governments would feel the pain if interest rates were to return to historical norms. “Canada’s interest payments to revenue and interest payments to GDP [ratios], at 7.8 per cent and 3.1 per cent, respectively, are the second weakest among this cohort behind only Italy.”

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Financial markets do not cut us the same kind of slack they happily grant Uncle Sam, whose Treasury bonds are still considered the world’s safest investment. And unlike euro zone countries such as Greece and Italy, we don’t have a German neighbour willing to bail us out to prevent the collapse of a common currency.

We’re on our own, for better or for worse. As a small, open economy that depends on global capital flows, Canada does not get to set its own borrowing limits. Bond markets implicitly do that for us. At least once before in recent history they have threatened to cut us off. Who is to say it could not happen again?

Back in 1994, when the federal net debt-to-GDP ratio stood at 66 per cent and The Wall Street Journal referred to our dollar as the “northern peso,” provincial debt levels were much lower than they are now. Indeed, right up until the beginning of the most recent recession, provincial debt was modest by most measures.

Now, Ontario and Quebec have net debt-to-GDP ratios exceeding 40 per cent. Once debt-free Alberta has racked up more than $45-billion in debt since 2015 alone. The Atlantic provinces have a combined debt of more than $50-billion. Experts, including the PBO, insist that provincial finances are unsustainable, raising concerns that Ottawa may eventually have to bail them out.

If a recession hits, Canada’s overall debt-to-GDP ratio could quickly surpass the 90-per-cent threshold that credit-rating agencies consider a flashing red light. The next federal government could face a far darker fiscal situation than any politician on the campaign trail is willing to admit. Their silence may be the most frightening thing about this sleepy election campaign.

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