Sean SpeerSkeptical about plans to balance the budget? You should be.

By Sean Speer, Feb. 3, 2017

Fiscal policy debates are invariably about numbers. Two figures – 2050 and 1.55 trillion – are presently front and centre. The first refers to the year in which the Department of Finance recently estimated that the federal government will balance its budget. The second refers to the accumulated federal debt by the same year. The resulting headlines and arguments seemingly write themselves as we’ve witnessed over the past month.

Both have their limits however. Long-term fiscal forecasts are useful for informing the trade-offs between short-and long-run policies and encouraging policymakers focused on electoral timetables to think of the future. But, as for their veracity, we’d be wise to exercise caution. One changed assumption or unanticipated development and these 40-year projections are greatly undermined. Imagine a similar assessment in 1916 that missed the Great Depression, WWII, and the Cold War, and one gets the picture.

It’s not that we shouldn’t be concerned about Ottawa’s fiscal position or the government’s opaqueness about its ongoing budgetary deficit. It’s that we should put more focus on short- and medium-term trends that could put us on the wrong fiscal path.

A more immediate number to concern policymakers and the general public then ought to be 2.4. It may seem trivial relative to 2055 and 1.55 trillion but it matters.

Ottawa’s timeframe for balancing the budget has shifted from a firm commitment of 2019 to a longer and more indeterminate horizon beyond 2021. But even this extended window is fraught with risks, including the government’s readiness to exercise discipline and make tough choices in order to meet its own spending plans.

Current spending projections anticipate average annual growth of 6.5 percent from 2015-16 to 2017-18. This isn’t unexpected. The government came to office with a plan to increase spending in the name of “kick-starting” the economy. One can certainly quibble with the composition of this new spending and its utility (which we have) but increasingly the greater question is what follows. And here’s where 2.4 comes into play.

How the government intends to exercise such fiscal restraint after increasing spending by nearly 20 percent in its first three years is largely unexplained.

Average program spending growth is supposed to fall to 2.4 percent between 2018-19 and 2021-22, which would effectively mean a more than 50-percent cut in year-over-year spending growth relative to the present. How the government intends to exercise such fiscal restraint after increasing spending by nearly 20 percent in its first three years is largely unexplained.

Achieving the projected drop in spending growth would require a type of sustained fiscal discipline that certainly deviates from recent behaviour. The reintroduction of the Labour-Sponsored Venture Capital Tax Credit, reversal of the increase to the Old Age Security eligibility age, and cancellation of sensible reforms to sick-leave benefits for federal civil servants are just three examples of past fiscal decisions that give doubt to the government’s willingness to make tough fiscal choices. Several big-ticket commitments such as new funding to the provinces and territories for mental health and home care are also still outstanding and will presumably need to be accounted for.

It’s not easy to hold the line on spending.

There is good reason therefore to think that the government’s current fiscal trajectory understates its future spending levels. That is to say it’s a safe bet that the 2.4 percent proves to be higher and Ottawa’s budgetary deficit is larger and longer as a result.

It’s not easy to hold the line on spending. Demands from different departments and interest groups are insatiable. Unexpected spending pressures are bound to surface. External shocks are always a threat particularly in a world with considerable political uncertainty. And the government hasn’t restored any contingency (or “adjustment for risk”) into its fiscal planning. The room for error is minimal.

What can the government do then to better control spending and ultimately achieve or improve upon its budget projections?

The first is to reconsider its aversion to codified fiscal rules such as balanced budget legislation. Such legislation could improve fiscal transparency, set clear markers for spendthrift departments and special interest groups, and help to reconcile trade-offs between spending priorities. It would serve as a legislative guidepost for fiscal policy decision-making and for parliamentary accountability and oversight.

Recall that the government repealed its predecessor’s balanced budget legislation on the grounds that it was “inconsistent with the government’s plan to return to balanced budgets responsibly, and in a manner that supports economic growth.” That the legislation did not preclude deficit spending but rather required that the government was transparent about its rationale for running deficits and had a clear plan to restore a balanced budget hardly seems restrictive.

But, nevertheless, if the government thought it was too limiting, there is nothing stopping it from introducing an alternative. The goal should be to restore the baseline assumption that the government should impose the taxes needed to pay for services it proposes to provide. Deviations from this baseline can be permitted where circumstances warrant but the onus should then be on the government to justify its decision and plan for returning to balance as soon as practical. The result would be to get at the “why” and “when” of deficit spending.

The second is to not only follow through on its campaign commitment to find $3 billion in annual savings through a review of government spending and tax expenditures, but to raise its ambition. In so doing, it can draw lessons from the review process the former Liberal government led under Jean Chrétien to modernize government and realize significant fiscal savings.

It’s far from a crisis but we can’t be complacent either. It’s important that Ottawa focus on short-term numbers in order to avoid long-term ones.

The principal benefit of structural reforms is that it would have the government cease programs or activities rather than simply find efficiencies, and in turn would diminish the risk of pent-up demand in the future. Areas to focus on include: enacting reforms to Canada Post and other antiquated Crown corporations, eliminating business subsidies, and improving sick-leave benefits for federal employees.

There are doubtless dozens of others but these would be a good first step to signal to the market and Canadians that the government is serious about eliminating the budget deficit, maintaining Canada’s strong public finances, and modernizing government programs and services.

Much of the focus on the 2017 budget will invariably be on the government’s fiscal position and the credibility of its plan to eliminate the deficit and maintain Canada’s relatively strong public finances. It’s far from a crisis but we can’t be complacent either. It’s important that Ottawa focus on short-term numbers in order to avoid long-term ones.

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

 

MLI would not exist without the support of its donors. Please consider making a small contribution today.