Liberals’ deficit plan to test Canadians’ rediscovered tolerance for debt
The Globe and Mail
Campaigning as the Western world teetered on the brink of an economic collapse, the leader of the Liberal Party of Canada momentarily seemed to allow that if things got really dire, a government under his watch might not be able to balance the budget.
By later the same day, back in 2008, Stéphane Dion was frantically backtracking. “A Liberal government will never, never cause a deficit,” he vowed.
That a Liberal government is now poised to do just that, not reluctantly but as the honouring of a campaign commitment that helped bring it to power, is a sign of the extent to which the politics around the country’s finances have changed since then.
But as they decide how far above their previous projection of $10-billion next year’s deficit should be, and how doggedly to stick to their promise to get back to balance by 2019, Justin Trudeau and the people around him will be grappling with just how much they can and should test Canadians’ rediscovered tolerance for red ink.
When it comes to that tolerance, the pendulum has swung rather a lot. Through the early 1990s, big structural deficits seemed to be an inescapable fact of life. Then, after governments undertook deep cuts to get to balance, we went through more than a decade in which running any deficits at all was seen as a politically fatal sign of weakness.
Then, just after the election in which Mr. Dion was at the Liberals’ helm, demand for stimulus spending in response to the massive recession made deficits actively in demand. The fact that the Conservatives were the ones to (reluctantly) start running them again helped give cover to parties on their left. And the lack of any great consequence in this country – unlike many other ones – helped make a bit of red ink seem normal again.
Straining to show they had gotten back to balance by this year’s election, Stephen Harper’s Conservatives clearly thought we were poised for another swing in perceptions. And even though promising to run deficits helped their party differentiate itself from its rivals during the campaign, Mr. Trudeau’s advisers seem cognizant those deficits being small and time-limited was part of the bargain, and allowing them to become something more than that could have electoral repercussions come 2019.
But there are other Liberals who point to recent elections – this federal one and the past Ontario one, most notably – as evidence that balanced budgets really aren’t a big deal for their target voters. And there are plenty of reasons it will be tempting to gravitate toward that view, or at least give in to it, in the leadup to their first budget and what follows it.
Whatever one makes of the new government’s inevitable complaints that the books it inherited are in worse shape than the old government let on, the Liberals cannot have fully anticipated the hit to revenues caused by resource-industry woes.
They also either failed to anticipate or willfully overlooked funding shortfalls in their own platform. They have already acknowledged their tax increase on top income earners won’t net the revenues they previously projected; there will undoubtedly prove plenty of expenditures they undersold as well. (The accounting cost of re-establishing lifelong pensions for injured veterans, worthy though that may be, is one example some government insiders concede has come onto their radar.)
There will be other cost pressures that were not factored into their plan. If the Trans-Pacific Partnership goes through, for instance, the Liberals will have to decide whether to adopt the $4.3-billion dairy-industry compensation package promised by the previous government, and how much help to offer the auto sector.
Bureaucrats in many departments undoubtedly have laundry lists of expenditures they couldn’t get through under the Conservatives, and could find receptive audiences in ministers who didn’t get into politics because they want to do less. So a Finance Minister still finding his way around Parliament Hill is going to have his work cut out for him pushing back against colleagues’ activist impulses, even if Treasury Board President Scott Brison – one of the few people in cabinet who has been there before – is able to help.
Much of the direction, of course, will come from the Prime Minister’s Office. Based on recent conversations, that could include a push wherever possible for capital expenditures over increases to program spending, because the latter carry more structural-deficit risk.
But even when deficits are too small to put the country’s fiscal health at much serious risk – and the Liberals continue to emphasize that our debt-to-GDP ratio will keep going down – they can make it harder to apply discipline. Aiming for a balanced budget, however arbitrary a goal that may be, raises the bar for each spending decision. If you’re already, say, $15-billion in the hole, a few hundred million here and there can more easily seem like drops in the bucket, until they add up.
As of now, there are few signs most people who would vote for the Liberals are terribly fussed by such concerns. But Mr. Trudeau, and the people around him, have to know that their own fiscal management – not to mention all the economic factors beyond their control – could easily move the pendulum again before four years are out.
Follow Adam Radwanski on Twitter: @aradwanski
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