Liberal Party Platform Merits a Bare “Pass”

  • National Newswatch

The Liberal Party's election platform released on Sunday confirms that the Liberals aren't concerned about the size of the deficit and growing debt, but are instead very comfortable hiding behind the fiction “of investments for the future” to justify new spending and tax cuts. Their platform proposes new initiatives totaling $4.1 billion in 2020-21, $8.3 billion in 2021-22, $9.3 billion in 2022-23 and $9.7 billion in 2023-24, thereby adding $31.5 billion to the federal debt. Using the Parliamentary Budget Office (PBO) baseline forecast this results in a deficit of  $27.4 billion in 2020-21, $23.7 billion in 2021-22, $21.8 billion in 2022-23 and $21.0 billion in 2023-24.It wasn't too long after the 2015 election that the Liberals abandoned their commitment to balancing the budget in 2019-20. Falling oil prices and slower-than-expected economic growth, together with their 2015 election promises, made any pledge to a balanced budget over the medium term impossible. They quickly shifted their fiscal anchor to a steadily declining debt-to-GDP ratio. This modified goal was achieved in all their budgets.But even this anchor is not without substantial risks.Under the Liberals' policy platform, the debt-to-GDP ratio remains at 30.9% for two years, 2019-20 and 2020-21, actually increases ever so slightly to 31% in 2021-22 and remains at that ratio until 2022-23. Only then does it start to fall very slowly. It wouldn't take much to throw this track off.First, for example, are the significant risks to the economic outlook. The risks to the economy and the fiscal framework have increased significantly since the Parliamentary Budget Officer (PBO) presented his status quo forecasts for platform planning purposes. These risks include trade tensions between the United States and China, military tensions in the Middle East, slowing economic growth in Europe and other advanced economies, Brexit, no ratification of the revamped NAFTA by the US Congress or Canadian Parliament, among others.Each of the Liberals' past four budgets included a $3 billion risk adjustment factor or Contingency Reserve.  This was included to offset potential adverse risks to the deficit forecast. No such reserve is included in the Party's platform projections released this week. If a contingency reserve were added, as it should be, the deficit would reach $30.4 billion in 2020-21 and $24 billion in 2023-24.Second, the Liberal platform includes some revenue raising measures, which under accepted budget accounting rules should be excluded. The Platform proposes savings of $2 billion in 2020-21 rising to $3.5 billion in 2023-24 from a review of spending and tax expenditures. In past budgets savings from such exercises were never booked until the savings were secured. Experience has clearly shown that the savings were often not realized. For example, Stephen Harper booked efficiency savings upfront, yet many of these savings were not realized or yet to be realized: for example the implementation of a new payroll system for federal public servants, which, as is now widely recognized, has become a nightmare for his successors. As such, it is premature to book possible savings from this “review” now.  Excluding these from the deficit calculation results in a deficit of $29.4 billion in 2020-21 and $24.5 billion in 2023-24.The Liberal Party Platform also assumes net proceeds from the completion of the Trans Mountain Pipeline expansion project. Again, such proceeds should not be booked until the project is completed and net proceeds are forthcoming. Furthermore, the estimated cost of $3 billion for planting 2 billion trees over the next ten years was not included, as it was assumed that revenues coming from the Trans Mountain pipeline would offset this cost. Again, it is premature to make these assumptions. This would add $300 million to the deficit in 2020-21, rising to $800 million in 2023-24. This would give a deficit of $29.7 billion in 2020-21 and $25.3 billion in 2023-24.Third, no update was provided for the current fiscal year, 2019-20. The PBO forecast a deficit of $20.9 billion for this year. However, this does not include the $1.9 billion payment to Newfoundland and Labrador under the new Hibernia Dividend Backed Annuity Agreement or the recent Human Rights Tribunal order to compensate First Nation children impacted by on-reserve child welfare abuse. These developments could increase the 2019-20 deficit by $6 billion and may reach almost $27 billion.Fourth, there are a number of commitments made in the platform, which are either not costed or fully costed. The two biggest ones are pharmacare and the increase and non-taxation of maternity and parental benefits. The costs associated with these are likely to be very large.Fifth, the proposed increases to employment insurance benefits will have to be financed through higher employment insurance premiums. The employee premium rate per $100 of earnable insurable income could increase by 6 cents for employees with the employer rate increasing by 9 cents per year. These increases are not mentioned in the platformFinally, with higher deficits there would be substantially higher public debt charges, and as a result even higher deficits. With the real cost of long-term borrowing close to zero, this is a good time for governments to borrow to finance real investment that would benefit future generations. This is the public finance principle underlying the Liberal policy platform. It is one that we agree with. However, it is not easy to decide what is an “investment” and what is not. Having said that, many of the proposed initiatives in the Liberal platform are “operational” in nature. They do not lead to increasing long-term productivity and economic growth, and they should not be financed by running deficits and higher debt.The Liberal Platform lacks transparency.  And, with multiple one-pagers, with no associated cost estimates, it is difficult to follow.  However, to its credit, the major new policy initiates were costed by the PBO, some with high risk factors. Those not costed include little rationale for the amounts allocated.Perhaps the biggest problem with the Liberal policy platform is its lack of credibility that it will actually achieve a declining debt-to-GDP ratio. Related Items
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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