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Minister of Finance Bill Morneau, seen here delivering a fiscal update on Dec. 16, 2019, insisted that he can do all three things. That would be some trick.Adrian Wyld/The Canadian Press

The magic trick of Liberal fiscal policy is that deficits and the debt burden are always going down, but never actually get lower.

That’s a trick that works great, until one day it doesn’t. Finance Minister Bill Morneau’s latest economic statement, released Monday, serves as a reminder that day will come.

Right now, Mr. Morneau is tasked with doing three big things and, unless the economy improves, he cannot do them all.

The federal deficit projections in the fall statement aren’t much different from the ones the Liberal Party estimated in its election platform. But the catch is that Monday’s projections don’t include the costs of most of the Liberals’ election promises. If they fulfill those promises, deficits will grow.

At the same time, the Liberals promise they will not increase the level of debt as a function of the size of the economy, the debt-to-GDP ratio. Mr. Morneau started emphasizing that yardstick in 2016, when the Liberals abandoned their promise to balance the budget in two years. It was supposed to be a “fiscal anchor” – a way to reassure people, and markets, that even if the annual budgets don’t balance, the public finances are under control.

If those were Mr. Morneau’s only priorities, then a little budgetary nip-and-tuck might make the numbers work out, more or less. The economy is still growing, though modestly, and interest rates are very low, so deficit spending comes cheap. The Finance Minister could squeeze in much of that promised spending without making the debt-to-GDP ratio rise much.

But he is supposed to have another task now: to keep some leeway to increase spending if there is a recession. Prime Minister Justin Trudeau put that in the Finance Minister’s mandate letter, tasking Mr. Morneau to “preserve fiscal firepower in the event that we need to respond to an economic downturn.” And if you want real “firepower” for a recession, it requires many billions.

Monday’s numbers tell us there isn’t much leeway. Deficit projections climbed higher because low interest rates led to shortfalls in public pensions. That’s not something the Liberal government did, but it still shows up in the figures. The Liberals might be able to deliver on election promises, or leave a lot of room for spending “firepower,” but they cannot do both – not unless they ditch the promise to keep the debt-to-GDP ratio from growing.

Mr. Morneau insisted that he can do all three things. That would be some trick.

Certainly, the Liberals will keep spending. Mr. Trudeau’s government might go slow on implementing universal pharmacare – the Liberal platform fudged that promise and the cost to the federal treasury would be substantial – but they will spend. If a downturn comes, the promise that the government will keep the debt-to-GDP ratio from rising will go out the window.

That in itself is not an automatic disaster. Interest rates are low, so the cost of increased debt is relatively small. But it will erase the yardstick that is supposed to reassure markets that Canada still has fiscal discipline.

And the reason Mr. Morneau is in that spot now is that the Liberal government kept stretching that yardstick to its limit.

Mr. Morneau’s statement promised the government will “continue to reduce” the debt-to-GDP ratio – but it is an innovative use of the word “continue.” The government hasn’t reduced it much, it simply kept forecasting reductions. In 2014-15, the debt-to-GDP ratio was 31.5 per cent, and now the government projects that in the coming fiscal year, 2020-21, it will be 31.0 per cent.

The same applies to deficits: they are always projected to grow smaller in the future. Mr. Morneau’s first budget in 2016 projected a deficit of $29.4-billion in the coming year (2016-17) and a $14-billion deficit in the fourth year afterward (2020-21). Monday’s economic statement projected a deficit of $28.1-billion in the coming year (2020-21) and an $11.6-billion deficit in the fourth year afterward (2024-25).

Whenever the deficit has turned out to be lower than expected, the Liberals spent the difference. So deficits and the debt-to-GDP ratio stay the same. Until one day they won’t. Using fiscal firepower to respond to a downturn will mean blowing the government’s fiscal “anchor” out of the water.