By Jack Mintz, April 20, 2021
Monday’s federal budget, the first in more than two years, is about pre-election spending financed by heavy deficits. The minister of finance, Chrystia Freeland, is rolling the dice that never-ending deficits will be manageable. There is no plan to balance the budget or to bring the federal debt back to pre-pandemic levels. If inflation and interest rates are subdued in the medium term, then there’s no need to worry — at least in Freeland’s eyes.
You have to dig pretty deep to find any reference to a fiscal anchor in this eye-straining 724-page federal budget. Only one reference, on page 53, can be found: “the government is committed to unwinding COVID-related deficits and reducing the federal debt as a share of the economy over the medium-term.”
This is a pretty weak fiscal anchor. It perpetuates deficit financing forever. It is also easily violated every time the economy slips into a recession, such as our recent one. As debt ratchets up as a share of the economy, the rule permits bigger and bigger federal deficits over time.
The recent pandemic-induced recession makes this point clear. Just before the pandemic, in 2019–20, federal debt was $721 billion, which is seemingly miniscule compared to today. The economy grew by 3.5 per cent that year, so the deficit could be high as $25 billion while still keeping debt from rising as share of the economy.
With the pandemic, the federal deficit ballooned by $354 billion — federal debt rose to $1.079 trillion for the fiscal year 2020–21. If economic growth were the same now as 2019–20 (3.5 per cent), a deficit of $38 billion would keep debt stable as a share of the economy.
***TO READ THE FULL ARTICLE, VISIT THE FINANCIAL POST HERE***