The boat for a return to a balanced budget in Ottawa has sailed. This government has no realistic route to get there – and frankly, it's not too worried about it. This budget cements that.
You might think that with an economic cycle near its peak, an economy running at full capacity and an election a year and a half away, a government that was elected on a promise of short-term deficits and a return to balanced budgets would want to take its foot off the gas and re-stock its fiscal ammunition. There may be no better time for an austerity budget.
Well, guess what? You've just seen it. This is as austere as this government is going to get.
The 2018-2019 budget tabled by Finance Minister Bill Morneau Tuesday has an $18.1-billion deficit gracing its bottom line – a substantial improvement over the $27.4-billion the government had forecast for the year when it issued its projections in last year's budget. The improvement is almost entirely a function of improved revenue expectations from a stronger economy; this isn't a case of a government reining in its spending.
But lest you start thinking this is leading to a balanced budget down the road, it's not on any road this government is mapping. By the end of the government's five-year projection period, 2022-2023, it still figures we'll be looking at a $12-billion shortfall. It will fight the next election, in the fall of 2019, with something like a $17.5-billion deficit – a far cry from its 2015 election promise to balance the books by its election-year budget.
The government some time ago redefined its yardstick for fiscal responsibility not as the budget balance, but rather in terms of Canada's ratio of debt to gross domestic product – arguing that as long as it is inching debt-to-GDP lower, all is good. And it's not an unreasonable stance; most economists would agree that debt-to-GDP is a fair measure of a country's capacity to carry debt. And Canada's debt-to-GDP ratio,, at a touch over 30 per cent and slowly falling despite the annual budget deficits, is in pretty good shape – although its decline has slowed to a snail's pace.
But when your annual deficits keep piling onto the numerator in that equation, you're counting on a rising denominator – GDP – to keep your head above water. And GDP growth in this cycle almost certainly already peaked, with last year's estimated 3-per-cent spurt. We're certainly closer to the end of the current cycle of economic expansion than the beginning. Economists see a slowdown is in our future. Should something push that slowdown over the edge and into a recession, it doesn't take a math professor to see that debt-to-GDP ratio swelling.
The Liberals' previous two budgets were all about changing the direction of government after almost a decade under the Conservatives, and there was a cost to that – to ramping up infrastructure investment, to redistributing taxes, to generally rebuilding the role of government in areas where it felt the Conservatives had neglected it in the name of fiscal restraint and small-government idealism. There was also an urgency to spend the money early in its mandate, to provide a fiscal stimulus to an economy that was struggling.
But much of that work is now done. The fundamental shift in policy direction is now quite firmly entrenched in the budget. And significantly, the economy is now back on its feet – indeed, as Mr. Morneau was quite happy to boast, it is doing very well indeed.
"We have an extremely positive situation in our economy right now," Mr. Morneau said in a news conference Tuesday. "We're in a very good position."
Exactly. The economy is running full-out, at or very close to its peak in this economic cycle. Fiscal Policy 101 dictates that this is when a government slows the spending engines, as the economy can get by quite nicely without its additional help. It's an excellent time to get your deficit house in order so you have as much room as possible to provide stimulus when the next downturn inevitably arrives (and your prized debt-to-GDP ratio has room to rise). Especially when the bulk of your long-term economic redesign is already in place.
And given the uncertainties surrounding the NAFTA negotiations, there's a very real risk that such a downturn could be accelerated by a trade-triggered economic shock. It would be prudent for the government to take maximum advantage of the current window to slash its deficit and restore fiscal space.
But this budget demonstrates that the government isn't prepared to meaningfully restrain its spending to take advantage of that opportunity.
Yes, there is evidence of some restraint. Program spending is budgeted to increase just 2.5 per cent in fiscal 2018-2019, well below the pace of revenue growth (4.5 per cent) and of projected nominal GDP (4 per cent), the key economic indicator for revenue capacity. That's a lot slower than the 6-per-cent-plus pace of the past two years, so at least the government is controlling itself relative to its own past tendencies.
But beyond this budget, the government anticipates program spending growth to be 3 per cent in 2019-2020 – the pre-election budget – and roughly 3 per cent thereafter. It tracks only modestly lower than projected nominal GDP and revenue growth; as a result, the deficit shrinks only modestly from year to year.
Indeed, the government's appetite for spending every dollar that lands in its lap is proving hard to suppress. Since issuing updated budget projections last fall, the government found an extra $5.8-billion to put toward its 2018-2019 budget balance. The budget it tabled Tuesday spends $5.4-billion of it.
In his budget speech, Mr. Morneau reminded Canadians that this is what they signed up for when they elected a Liberal government in 2015: A government committed to investing in the future, not one that saw balanced budgets as the fiscal holy grail.
But in sticking to his guns on increased investment, at a time when the economy clearly doesn't need the additional stimulus, Mr. Morneau is missing an opportunity to jump off the spending merry-go-round while he can. If this is as restrained as his government is willing to get, it may not be nearly enough to prepare the country for the inevitable economic storm.