A stronger Canadian economy has helped bring Ottawa's deficit down to a more presentable scale, and has taken some of the pressure off the federal Liberals to address their bloated imbalances. But the hard work for the government is still ahead. If it's going to meet its budget targets, it's going to need to deal with its spending habits.
The government's own budget projections suggest it believes it will do just that over the next five years. Randall Bartlett, for one, doubts the government has the belt-tightening fortitude to deliver.
Mr. Bartlett, chief economist at the University of Ottawa's Institute of Fiscal Studies and Democracy, penned a new report that questions whether Ottawa's projections of steadily declining budget deficits over the next five years are realistic. While the government's fall economic update forecast that the deficit would shrink from nearly $20-billion in 2017-18 to a modest $12.5-billion in 2022-23 (and that's with a $3-billion contingency cushion built in), Mr. Bartlett believes that the deficit is actually more likely to increase in each of the next five years. He projects the shortfall will reach $31.5-billion in 2022-23.
The key difference between the government's outlook and Mr. Bartlett's is the expectations around spending – specifically, on direct program expenses, the broad segment of federal spending over which the government has the most discretion. (Its other big program expenses – transfers to the provinces and to individuals, are by nature much more rigid, while public debt charges are subject to the whims of interest rates.)
The government's own projections have pegged annual increases in direct program expenses at an average of just 1.2 per cent from now through 2022-23. That would require running a pretty tight ship – much tighter than the Liberals have been sailing since they took office in late 2015. In their first two full years in office, the Liberals increased direct program expenses by an average of nearly 7 per cent a year; now they're asking us to believe they can constrain themselves to spending increases below the rate of inflation (typically about 2 per cent over time).
"The Government of Canada's outlook for direct program expenses requires a suspension of disbelief beyond the usual leap of faith needed to swallow any government's fiscal forecast," Mr. Bartlett concluded in his report.
Which isn't to say it can't be done. The previous Conservative government actually reduced direct program expenses in each of its final five years in office in its quest to eliminate the deficit. (It achieved its goal in the 2014-15 fiscal year, turning in a small surplus.) But as Mr. Bartlett noted in an interview on Wednesday, "The political context is very different."
The Conservatives, under Stephen Harper, saw eliminating the deficit as their government's primary concern; they were committed to balancing the fiscal books before the 2015 election, "come hell or high water," as Mr. Bartlett puts it. (Indeed, the Conservatives were still determined to balance the books even as the Canadian economy was hit hard by the 2014-15 oil shock – a position that contributed to the Bank of Canada's decision to cut interest rates twice in 2015 to help stimulate a struggling economy that was getting no lift on the fiscal side.)
The Liberals have yet to demonstrate, in any concrete way, that they have an appetite for that sort of spending restraint.
"Their behaviour has not been that of a government that has set much of a priority for fiscal probity," Mr. Bartlett said.
To be fair, the current government would only need to slow the pace of growth in its spending, not cut it outright, in order to meet its five-year budget projections – what Mr. Bartlett calls "soft austerity." But even that won't be easy. Keeping spending to something below the pace of inflation is essentially a cut, in real terms. And, if you consider population and economic growth during that period that adds upward pressures on government outlays beyond inflation, "the federal government's spending forecast is even that much further out of reach," the report said.
Perhaps the hardest pill to swallow in the forecast, Mr. Bartlett said, is that the government has projected essentially flat direct program spending in 2019-20 – an election year. That's usually when governments are rolling out perks for voters, not turning off the fiscal taps.
Still, this is a government that was elected on a promise of only small, short-term deficits, and a return to balanced budgets. While its commitment to that promise is pretty much gone, its fiscal projections nevertheless show a desire to rein in spending and limit the red ink. What it hasn't explained to anyone, yet, is how it intends to turn its spending tide.
"We don't know what the plan is. There is no plan," Mr. Bartlett said.
And the hard reality, Mr. Bartlett argues, is that it's difficult to contain direct program expenses in a meaningful way without containing public-sector payrolls. Staff account for roughly half of the government's operating costs. If the Liberals are going to meet their spending targets, they will probably need to either cap wages or cap staff levels.
Regardless, these are questions the government needs to start addressing, and soon – starting with its next budget, likely only a couple of months away. Without some clear answers, its fiscal projections are rose-coloured ambitions in the place of hard decisions.