Regarding last week's federal budget, readers will hear plenty about revenue and spending growth, debt-to-GDP ratios, and other metrics and measurements used to argue one position or the other, writes Sean Speer in the Telegraph-Journal.

By Sean Speer, March 3, 2018

What is one to make of last week’s federal budget? Is Ottawa’s deficit spending a problem to be remedied? Or is the government’s focus on “investment over austerity” the right plan for Canada?

There are various voices on this issue. Readers will hear plenty about revenue and spending growth, debt-to-GDP ratios, and other metrics and measurements used to argue one position or the other.

This evidence is important. It roots our debates and discussions in more than simple innuendo or unsubstantiated opinions. But it can sometimes be difficult to make heads or tails of what people are saying about government spending and deficits.

It’s both true for instance that federal spending per capita (adjusted for inflation) is the highest it has ever been and spending as a percentage of GDP is still lower than it has been in previous decades.

It’s both true that Ottawa’s deficit is partly a reflection of a drop in revenues relative to the Harper government’s final budget and mostly driven by a 20-percent increase in government spending over the past three years.

It’s both true that Ottawa is now set to run annual budgetary deficits for the foreseeable future and that the federal debt as a share of the economy is relatively low and set to fall.

And it’s both true that the budget has some useful, targeted measures including an expansion of the Working Income Tax Benefit to support low-income workers and some large, unfunded liabilities such as a national pharmacare regime that could exacerbate Ottawa’s fiscal gap.

So, who is correct? Is the budget good or bad? Should readers be concerned about spending and deficits or satisfied with the fiscal trends?

How one answers these questions is motivated in large part by different preferences about the role of government, taxation, and spending. Our views on these matters naturally differ based on competing values and priorities.

But that doesn’t mean there’s no room for evidence. It was long-serving U.S. senator Daniel Patrick Moynihan who famously said, “everyone is entitled to his own opinion, but not to his own facts.”

Here are some facts for readers to consider:

  • The year-over-year deficit is actually higher in the current year (2017/18) than it was last year (2016/17). This is concerning because (1) the revenue gap relative to the Harper government’s final budget is much lower this year than last year and (2) economic growth was stronger this year than last year. This means that the rise in the deficit is driven principally by higher discretionary spending.
  • Program spending grew by an average of 6.3 percent in the Trudeau government’s first two years in office. It’s set to grow by another 6.1 percent this year. It’s then projected to grow by an average of 2.8 percent over the next five years. How realistic is this projected drop in spending growth? How will the government suddenly exercise such sustained spending control after its past record of profligacy? What happens if spending growth proves to be higher? The risk is a larger and longer deficit.
  • There are short-term spending pressures on the horizon. Research by the Macdonald-Laurier Institute generally finds a historical pattern in favour of higher spending in the lead up to elections. This could have inflationary effects on next year’s spending plans as the 2019 campaign approaches. A new national pharmacare strategy would also drive up federal spending. The Parliamentary Budget Office estimates that it could cost as much as $19 billion per year. And there are doubtless other unforeseen expenditures that will emerge in the coming years.
  • Economic growth is also projected to slow down over the period. It was 3 percent in 2017. It will fall to an average of 2 percent over the next five years. This doesn’t account for possible economic shocks – including the potential for the Trump administration to terminate the NAFTA. A downgrade to these economic projections could lower revenues and in turn increase and prolong the deficit.
  • Long-term demographic trends will invariably place pressure on both revenues and spending. The resultant “fiscal squeeze” will be reflected in a declining revenue base and higher spending demands for pensions, health care, and other age-related expenditures. It may in fact ultimately require fiscal reforms – including to our fiscal federalism to help provinces and cities – as we grapple with rising cost pressures due to population aging.

The upshot is that while fiscal alarmism may be unjustified, surely so is fiscal complacency. Ottawa’s budget projections will soon face pressure from all directions. The risk to federal finances is likely to the downside. The consequences could be a worsening fiscal picture. It’s hardly a “debt bomb” but that’s no excuse to neglect the risks and pressures to the government’s bottom line either.

Remember we did that in the 1970s and 1980s when successive governments pushed off “austerity” in the name of “investment.” These policy choices may have seemed justified in isolation but cumulatively they were costly and eventually caused significant fiscal challenges.

The solution, then, is not necessarily austerity but rather a more focused debate on how the government can better manage the fiscal risks and pressures it’s bound to face. That’s the big takeaway from this week’s budget. We need to have it. Let the best ideas and arguments win.

Sean Speer is a Munk Senior Fellow at the Macdonald-Laurier Institute.

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