Canada’s fiscal hawks in a predictable lather over Liberal deficit spending

For almost a decade now, Justin Trudeau’s Liberals have been betting Canadians don’t care as much about deficits and debt as conservative politicians and pundits want them to. That paid off handsomely in 2015 when they outflanked Tom Mulcair’s NDP by announcing their willingness to run deficits, a decision that turbocharged their campaign and eventually delivered them a majority government. Now, with their most recent budget, they’ve clearly decided to press their winning bet.

After suggesting last fall that the government could post a healthy $4.5-billion surplus by 2027, the government’s projections now forecast a $14-billion deficit. All told, Canada’s debt will climb by nearly $70 billion over the next five years. That spending is going towards a number of priorities, from $22 billion on the health-care deal with the provinces announced last month to $7 billion for an expanded dental care program and $2.5 billion on an expanded GST credit for lower-income earners.

This has Canada’s fiscal hawks in a predictable lather, with hands being wrung from coast to coast about the best interests of future generations. As the Globe and Mail’s editorial board wrote, “budgets are about deciding where to spend, and just as important, where not to spend. The biggest fiscal failure of the Trudeau Liberals has been their insistence on ignoring this basic tenet of sound finance, and instead each year layering new spending on old, while blithely ignoring the mounting pressure of the national debt.”

The Fraser Institute, which has never passed up an opportunity to criticize government spending, played its part to perfection. “More government intervention, spending and debt are not the keys to success for Canada’s fiscal future,” associate director of fiscal studies Jake Fuss wrote. “Layering new spending on top of old and expanding the size of government will not drive down inflation or grow the economy. This year’s budget simply continues a reckless approach to federal finances.”

But recklessness, like so many things, is in the eye of the beholder. The government, for its part, would probably argue it would be reckless not to at least try to match the fiscal gauntlet laid down last year by the Biden administration and its Inflation Reduction Act. The cost wouldn’t show up on any near-term financial statement, but it could easily be measured in hundreds of thousands of jobs lost and billions in tax revenue foregone if Canada were to opt out of the increasingly competitive race to attract clean technology investment. Time will tell whether the new tax credits for clean energy and low-carbon technology, which could be worth upwards of $80 billion over the next decade, will deliver a good return. But doing nothing here would be a textbook example of being penny-wise, pound-foolish.

When it comes to the cost of these new measures, we can and should set the fear-mongering aside. Canada still has the lowest debt-to-GDP and deficit-to-GDP ratio in the G7, and both figures are now on the decline in the wake of the COVID pandemic. As University of British Columbia economist Kevin Milligan tweeted, this “is a good indication that there will not be a need for tax increases to afford future public debt payments. In other words, 'fiscal crisis' lol no.” And as Milligan noted, the cost of servicing Canada’s debt is likely to settle in around 1.5 to 1.6 per cent of GDP, which is lower than almost any point since the 1960s and only marginally higher than historical lows. “Again, for anyone looking for signs of an incipient fiscal crisis....uh, no.”

Pierre Poilievre and other Conservatives are welcome to make their case about the Trudeau government’s lack of fiscal responsibility. They can promise to balance the budget if they’re elected. That’s all part of a healthy political debate. But they might want to remember that Canadians aren’t nearly as invested in this issue as they are and have voted accordingly in the past. And while this clearly isn’t the same sort of Liberal government as the one in the 1990s that tamed the deficit and then reeled off a string of surpluses, that may not be what Canadians want right now — or what they need.

Just because the Trudeau government’s bet on deficits has paid off in the past doesn’t mean it will continue being a winner indefinitely. But when the choice is between the government taking on additional debt and their own household doing it, most Canadians are going to choose the former. And for all the talk about an imminent fiscal reckoning, the data simply doesn’t support that. Yes, there are limits to what the government can and should be spending on Canadians. But for better or worse, we’re still a long way away from that.

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