Philip CrossBudget 2016 is proof that Canada’s new federal government doesn’t yet know how to reject unaffordable spending programs, writes Philip Cross.

By Philip Cross, March 23, 2016

The most troubling issue raised by the federal budget is not the average $40 billion of actual borrowing projected over the next two years, but how fast Bill Morneau will grow into his job as the Minister who says No.

Canada has been well served by a string of great finance ministers — liberal and conservative— stretching from Paul Martin to John Manley to the late Jim Flaherty. A good finance minister covers many blemishes in any government. They all understood that an important part of the job is saying no — no to unaffordable spending programs, no to deficit-financing as the reflexive choice of governing.

Frankly, it seems that Morneau has skipped the procedure to turn his heart into stone.

John Manley apocryphally tells the story of how, when named minister of finance, you are escorted to the basement of the Finance building and laid out on an operating table where faceless mandarins cut open your chest, rip out your heart and insert a piece of Canadian Shield in its place. This is because you need a heart of stone for all the times you will say no—whether to self-serving unions, businesses and provincial governments or to well-meaning cabinet colleagues who have no concept of a budget constraint.

Frankly, it seems that Morneau has skipped the procedure to turn his heart into stone. The only ones who have publicly said no to this government have been the provinces. First they said no to CPP expansion in January, and then no to a national carbon tax in March. That Scott Brison at Treasury Board claims Morneau occasionally said no while preparing the budget is hardly reassuring, since it implies the Liberal cabinet on its own wanted drunken-sailor deficits of $50 billion or more, a level last seen at the worst of the global economic crisis in 2009.

The economy on its own is gradually responding to stimulative factors such as strong U.S. auto sales and lower gasoline prices. News that manufacturing sales hit a record high and retail sales rose strongly in January demonstrate the economy was not the basket case portrayed by Liberals during the election. Still, this government is wedded to its own election sloganeering that the economy is in dire straits even outside the oil-producing regions. The budget takes a bi-polar view of global risks; the Canadian economy is full of risks to the downside that require deficit spending, but assumes no risk lurking in the global financial system that would require the sort of extreme fiscal response the Harper government adopted in 2009.

As a result, Morneau has opened the deficit floodgates, unperturbed by the prospect of the deficit’s lunar trajectory despite a growing economy and no prospect of balancing the books by the end of the government’s mandate.

While growth in Canada will benefit little from sharply higher deficits, the added debt will burden future governments and taxpayers.

What sort of benefit can the Canadian economy expect from these deficits? Very little, according to plenty of studies on the fiscal multiplier published by the NBER. The research demonstrates no net stimulus from fiscal policy in an economy with a floating exchange rate, like Canada’s, because it is offset by tighter monetary policy. The loonie’s recent rally above US77 cents is a good example. The surge was not all due to higher oil prices; it also reflected investors anticipating that the Bank of Canada’s infatuation with lower (or even negative) interest rates is over. The loonie’s upturn began almost to the day in January the Bank of Canada announced it would not cut interest rates.

While growth in Canada will benefit little from sharply higher deficits, the added debt will burden future governments and taxpayers. We have reduced the distortions of extreme monetary policy (such as a falling exchange rate and changed incentives for saving and borrowing) by increasing the distortions from extreme fiscal policy. Such is progress in today’s world of macroeconomics.

The appointment of a novice MP like Morneau–the first rookie at Finance since 1919–was a curious move. Usually, becoming minister of finance is the culmination of years of seasoning and learning how government works. It now looks like Morneau was picked precisely because he would have difficulty saying no to his high-spending cabinet colleagues.

Canada’s unfortunate experience with hitting the “debt wall” in the mid-1990s showed that deficits don’t fix themselves.

An artful government could have boosted the economy without spending its own money. Private sector firms are waiting for the green light to build pipelines to both coasts, boosting infrastructure spending and permanently lowering the price discount for our oil exports which are trapped in the over-supplied U.S. market. Over the last decade, Canada has invested nearly $1 trillion in developing its energy assets. We need continued investments to maximize the return on these investments, not strand them with utopian plans for greening the economy.

Canada’s unfortunate experience with hitting the “debt wall” in the mid-1990s showed that deficits don’t fix themselves. Government in Canada subsequently developed an aversion to debt that served us well during the debt-fuelled financial crisis enveloping the U.S. and much of Europe in 2008. However, despite these vivid reminders of the dangers of debt, we are now plunging head first into the treacherous waters of large deficits in a growing economy.

Philip Cross is a Senior Fellow at the Macdonald-Laurier Institute.

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