Who really cares about the deficit?

  • National Newswatch

At the start of the 2019 election campaign, most political commenters did not see the “deficit” becoming a major issue in the election. The reality is that the federal government has neither a deficit nor debt problem. According to the just released Annual Financial Report (AFR), the deficit for 2018-19 was $14 billion or just 0.7% of GDP.  And, Canada's debt-to-GDP ratio is the lowest among G-7 countries.However, going forward, the deficit in the short term will be much higher. The March 2019 Budget forecast a deficit of $19.8 billion for 2019-20; the Parliamentary Budget Office (PBO) is a bit more pessimistic, forecasting a deficit of $20.7 billion. However, both these forecasts are now far too low.In April 2019, the Government announced an agreement with the province of Newfoundland and Labrador to provide a one-time payment of $1.9 billion under the new Hibernia Dividend Backed Annuity Agreement. In addition, earlier this month, the Canadian Human Rights Tribunal ordered Canada to compensate First Nations' children and their families impacted by the on-reserve child welfare system.  This liability could range between $2 billion and $4 billion. If sufficient funds have not been set aside in previous budgets, which appears to be the case, the deficit for 2019-20 could be $4 billion to $6 billion higher than current estimates.To make matters worse, there are major short- and medium-term economic, political, and financial risks to worry about. These include tensions in the Middle East, talk of recessions in several major developed economies, Brexit, and the trade war between the United States and China. In addition, the USMCA has still to be approved by the U.S. Congress and the Canadian Parliament.The most recent PBO fiscal projections (June 2019) show a deficit of $23.3 billion in 2020-21, falling gradually to $9.0 billion in 2024-25 and to $0.2 billion in 2028-29.  The federal debt-to-GDP ratio is expected to decline continuously over this period, from 30.8% in 2020-21 to 25.0% in 2028-29, the lowest in forty years.However, we are only a couple of weeks into the election and all parties are making major policy announcements daily and the costs are beginning to add up rapidly. So, what does this all mean for Canada's fiscal prospects? How much will these election promises cost taxpayers, and how will they be paid for?After only two weeks, Mr. Scheer's election proposals amount to over $7 billion in 2024-25.  To balance the budget in 2024-25, Mr. Scheer would require at least $16 billion of restraint measures. This will be major challenge for Mr. Scheer. To make the challenge even more difficult the Conservative Party leader has committed to ensuring that the Canada Health Transfer and the Canada Social Transfer continue to grow. But he has said nothing about the other transfers to provinces, especially equalization. In addition, we don't know if he is ruling out cuts to major transfers to elderly benefits, employment insurance benefits and children's benefits.  If all these transfers were also exempt from “restraint” then any expenditure cuts would have to be found in direct program expenses, which are projected to total $158.5 billion in 2024-25.But this component of program spending includes defence expenses, international assistance, and transfers to First Nations, student loans, and assistance to farmers, among others.  Eliminating a $16 billion deficit in 2024-25 would require a 10% cut to these programs. With more election promises to come, this deficit number is going to become even larger in the coming weeks.These expenditure cuts are not going to happen; just ask Prime Minister Harper how futile this can be. Mr. Scheer will not want to spend the next four years following the pointless fiscal strategy of his predecessor. Nor, however, will he want to increase taxes. Perhaps he will decide, if elected, that Prime Minister Trudeau has been right all along. Why worry about the deficit as long as the debt burden is falling?Liberal election promises are also rapidly rising and like the Conservatives could reach double digits by the time of the election. But Prime Minister Trudeau is in the enviable position of not having to worry about the deficit implications of his election promises since the Liberals are not committed to eliminating the deficit any time soon. Even with a $16 billion deficit, major spending cuts are not likely on their fiscal agenda.Mr. Singh and Ms. May both have long lists of election promises, but neither has provided details or cost estimates so far. Rest assured they wouldn't be cheap. Both, however, have indicated that they would pay for their promises by increasing taxes on the wealthy, eliminating business subsidies and increasing the statutory large corporation tax rate.There is one important fiscal management issue that should be of concern to voters. It is the issue of trust. Which, if any of the political parties, can be trusted to be accountable and transparent when it comes to fiscal management. Based on both the historical record and the experience of other countries, the answer, unfortunately, is probably none.Except for Paul Martin's commitment to eliminate the deficit “come hell or high water”, commitments to deficit elimination by a specific date aren't worth the paper they are written on. Economic and political circumstances are constantly changing and so are deficit forecasts.Prime Minister Trudeau got rid of his election promise when he realized the economic outlook in 2015 had worsened significantly since the election five months earlier. He is not going to make the same mistake again.Earlier this year Mr. Scheer committed to eliminating the deficit in his first three years in office. It didn't take him long to drop this commitment when he realized first, that for both economic and political reasons, he couldn't do it; and second, that he didn't need to do it, since the federal government does not have a deficit or debt problem.Mr. Scheer is now committed to eliminating the deficit “in a responsible way over five years”. As noted above, this commitment, whatever it means, won't last long. At least Mr. Singh and Ms. May have said how they would pay for their promises, no matter how improbable their proposals are.Let's hope the political parties will release their fully costed policy platforms sufficiently in advance of the election to allow adequate study, discussion and commentary.C. Scott Clark held a number of senior positions in the Canadian Government, including Deputy Minister of Finance from 1998-2001.  He has a PhD in Economics from the University of California at Berkeley and is currently President of C. S. Clark Consulting.From 1990 to 2005, Peter C. DeVries served as Director, Fiscal Policy Division, at the Department of Finance.  In that capacity he was responsible for overall preparation of the federal budget.  He is currently a consultant in fiscal policy and public management issues.Their Blog is 3dpolicy.ca