Ottawa’s deficit is primarily the result of fiscal choices rather than economic circumstances, write Sean Speer and Brian Lee Crowley in the Financial Post, and increased spending has nothing to do with “investment,” transformational or otherwise.
By Sean Speer and Brian Lee Crowley, Nov. 8, 2016
The story in last week’s spendthrift fall economic statement had two plot lines. The first was deteriorating economic conditions and, in turn, lowered revenues driving up the government’s budget deficit. The second was that more infrastructure spending — what Finance Minister Bill Morneau described as “transformational investments” — was the key to breaking out of the low-growth trap and creating the conditions for future economic growth.
Yet the numbers tells a different story. Ottawa’s deficit is primarily the result of fiscal choices rather than economic circumstances and increased spending has nothing to do with “investment,” transformational or otherwise.
The fall economic statement recognizes that the government’s fiscal position has worsened considerably since its predecessor’s last budget in 2015. At that time the expectation was that by 2019/20 Ottawa would have socked away $21 billion in surpluses. The new government now says that those five years will produce accumulated deficits of $99 billion, or a shift of roughly $120 billion.
It’s a dramatic swing. What’s behind it?
Of this amount, roughly one-third ($42 billion) is the result of lower revenues due to deteriorating economic conditions. The government can rightly argue that the drop in economic activity and resulting decline in federal revenues (an average of $8.5 billion per year) is mostly outside its control. A combination of commodity price volatility, Alberta wildfires, and other external factors are largely to blame.
This means that any government would be facing short-term deficits in the absence of choices to constrain spending and protect a balanced budget. Conservative critics ought to recognize this basic arithmetic.
But remember, this only speaks to one-third of Ottawa’s fiscal woes. The other two-thirds ($83 billion) is caused by higher government spending. That is, the government has deliberately chosen to push up spending by an average of nearly five per cent annually over this five-year period in the name of “investing in our future.”
Morneau’s story is that infrastructure is the major source of this new spending and that this “investment” will not only produce long-term economic growth but will essentially pay for itself as a result. We cannot emphasize enough that the government’s rationale for ramping up already historic levels of infrastructure spending is that it will unlock productive potential in the Canadian economy by lowering costs and increasing efficiency.
But even on the government’s own rather loose definition, “infrastructure” only gets one-quarter ($22 billion) of new spending. The other three-quarters ($62 billion) is mostly just run-of-the-mill government spending. This might or might not be money well spent but it clearly is neither “investment” nor “infrastructure” by any commonly accepted definition.
And even of the new infrastructure funding, a considerable share relies on what can only charitably be termed an elastic definition that includes cultural and recreational facilities and other non-economic-oriented infrastructure. In fact, only roughly seven per cent (or $1.6 billion) of the new infrastructure spending over this five-year period is designated for “trade and transportation infrastructure.” One can argue that cultural and recreational facilities may provide welcome amenities in our neighbourhoods and communities but it’s hard to argue that it’s productivity-enhancing “investment” that will repay its cost through heightened economic activity.
Put another way: only two per cent of the government’s deficit-financed spending over the five years to 2020 is on genuine efficiency-enhancing infrastructure of the kind whose cost we might hope to recover through higher taxes generated by increased productivity. Yet it was this latter kind of infrastructure that the Liberal party used to justify its plan for deficit financing in the last election campaign.
The upshot: Even based on its own accounting, Ottawa’s fiscal plan is overwhelmingly one that increases government borrowing to spend on salaries, benefits, and feel-good projects with limited stimulus value. We won’t get much of an economic boost, but we’ll certainly get the bill in the form of higher debts and, eventually, the higher taxes needed to pay them.
Ottawa isn’t to blame for declining revenues but it’s responsible for exacerbating the country’s fiscal challenges by failing both to honour its campaign promise and to focus new spending on real investments.
Like many a movie, the government’s fiscal story may seem compelling but it relies on special effects and heavy editing to make the improbable appear plausible. As they say on TV, don’t try this at home.
Brian Lee Crowley is the managing director and Sean Speer is a Munk senior fellow at the Macdonald-Laurier Institute.