It appears Justin Trudeau’s government has abandoned the goal of ever balancing its budget. In her fall economic update, Finance Minister Chrystia Freeland laid out her new fiscal policy. And it’s deficits all the way to the horizon.
Rather than setting forward a plan to work back to a surplus after years of red ink, Freeland indulged in sleight of hand.
There will be deficits far into the future, she admitted, but made much of a promise to exercise “fiscal restraint” by keeping them below one per cent of gross domestic product (GDP), starting three years from now.
Based on present economic projections, that would mean a deficit of around $32 billion in 2026. The deficit for the current year is forecast at $40 billion.
It’s long been a principle of government financing that the budget should be balanced over the economic cycle. That means deficits in bad years, paid for with surpluses in good years.
Not only is that principle now cast away, but outright trickery takes its place. Let’s suppose that by 2026 the economy is booming.
Time to run a surplus and pay off some of the debt, it might seem. In fact the opposite occurs. Because she’s tied the size of the deficit to the size of the GDP, Freeland gets to increase the deficit, not reduce it.
This is fiscal madness. A rising economy brings with it a growth in federal revenues. There should be no need to keep spilling red ink in that situation.
And this policy comes with a cost. Interest payments on the government’s debt have already more than doubled, from $20.3 billion in 2020-21 to $46.5 billion this year.
Moreover that figure is forecast to reach $60.7 billion by 2028-29. That’s more than double the combined budgets for Health Canada, the RCMP, the Public Health Agency, the Department of Agriculture, Canada Post, the Department of Fisheries and Oceans, Corrections Canada, and the CBC.
Trudeau, apparently, is taking after his father. With one exception, during his 15 years in office Pierre Trudeau ran deficits every year.
Yet the issue isn’t simply the gathering interest payments. Over the eight years since it was elected, the Liberal government has increased spending by 84 per cent, far higher than inflation or growth of the population. And this expansion of the federal enterprise is now projected to continue with no end in sight.
While some of the early deficits can be attributed to the costs of dealing with the COVID pandemic, Freeland shows no signs of returning to a manageable rate of growth.
We’ve been down this road before. During the 1970s and 1980s, successive governments, both Liberal and Conservative, ran deficits every year.
Eventually Canada had built up the worst per capita debt load of any of the G-7 countries except Italy.
It was only in the mid-1990s, after interest costs became prohibitive, that Jean Chrétien’s government was finally forced to call a halt.
Spending cuts totalling nearly 20 per cent were imposed, including a reduction of 60 per cent in business subsidies. And the cuts were applied across the program base, in a sense cutting the heads off the flowers and the weeds alike.
Taxes were hiked, and transfer payments to the provinces were scaled back.
Here was the genesis of Ottawa’s inability to keep its promise to pay 50 per cent of Medicare costs.
A re-run of this slash and burn exercise is what lies ahead if Freeland keeps to her present course. She may not pay the price now, but future governments will, as will all of us.
