How the Liberals could balance the budget—if they have the will

With the budget, the Liberals have taken a page out of the Conservative plan for program expenditures. But there are many reasons to think it won’t work.


 
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Canada's Prime Minister Justin Trudeau and Finance Minister Bill Morneau (R) walk from Trudeau's office to the House of Commons to deliver the budget, on Parliament Hill in Ottawa, Canada March 22, 2016. (Chris Wattie/Reuters)

Canada’s Prime Minister Justin Trudeau and Finance Minister Bill Morneau (R) walk from Trudeau’s office to the House of Commons to deliver the budget, on Parliament Hill in Ottawa, Canada March 22, 2016. (Chris Wattie/Reuters)

The Government will set a timeline for balancing the budget when growth is forecast to remain on a sustainably higher track.

That sentence on page 53 of the 2016 budget plan has been seen by many—including myself—as an admission that the new Liberal government didn’t really know how it was going to balance the budget, and that they’d be getting back to us when they figured something out. I’m now not so sure that this is the correct interpretation.

To be sure, it wasn’t an unreasonable inference to draw. A fair bit of detail was provided for new spending measures over the next two years, but not for the last three years of the planning horizon. Moreover, the use of the word ‘when’ suggests that the Liberals aren’t prepared for the eventuality that growth forecasts may not improve. I didn’t pay much attention at first to the numbers for 2018-2021, even though they showed the deficit closing over time. I didn’t think they were a plan, more like an artist’s impression of what a plan might look like.

Gordon_deficit_reduction

The confusion, I think, revolves around the use of the word ‘timeline.’ What if the Liberals do have a plan to balance the budget, but they’re just not sure when the plan will actually come to fruition? This would explain the use of the word ‘timeline,’ as well as the occasional mention of the possibility that the budget will be balanced in five years.

When you look at the projections for the the last three years of the budget’s planning horizon, a familiar pattern emerges. Program expenditure growth—and in particular, growth in direct program expenditures—is set to decelerate sharply after the surge in spending in the two preceding years. If the economy—and hence government revenues—grow more quickly than expenditures, then the deficit will eventually close as the economy grows. Exactly when it will close depends on economic growth rates over the next few years.

If this strategy sounds familiar, it should: it’s the same one the Conservatives set out in the 2010 budget and applied faithfully throughout its last mandate. The parallels are quite striking:

plan1

The Liberals’ plan in 2016 is to hold an even tighter grip on direct program expenditures—that is, spending on salaries, goods and services—than the original Conservative plan in 2010.

If spending grows more slowly than GDP, then the expenditure-GDP ratio must fall over time. Again, the parallels between the last three years of Budget 2010 and the last three years of Budget 2016 are remarkable:plan2There’s no real problem with the arithmetic involved in this sort of deficit-reduction strategy. The issue is political will. When I first wrote about the Conservatives’ plan to return to balance back in 2012, I was skeptical:

The strategy is to hold direct program spending constant—which means a reduction in terms of share of GDP—and letting transfer programs grow with GDP. Revenue growth—personal income tax revenue growth in particular—is supposed to close the gap between spending and revenues (Table 5.8 of the budget).

I have my doubts about whether that plan will last four years: that’s a long time to sustain a regime of continual program erosion (“cuts” doesn’t seem to be the right word). Stuff happens.

As we all know, Stephen Harper’s government did turn out to be equal to the task of holding the lid on spending, and it presided over a steady decline in federal government spending as a share of GDP.

I’ve already been proved wrong on this point once before, but I’m even more skeptical about the Trudeau Liberals’ political will to carry out their deficit plan. Even though their political base was broadly supportive of austerity, the Conservatives were coy about telling Canadians what exactly was being cut. But after releasing the results of the Conservatives’ program review and after making repeated commitments about transparency in government, the Liberals will be hard-pressed to make use of the Conservatives’ tactic of making cuts, telling no-one and hoping that nobody notices.

More importantly, the Liberals just fought and won an election based on a campaign that promised to end years of grinding Conservative austerity. It seems unlikely that they’ll be able to smoothly throw that messaging into full reverse in the third year of their mandate.


 

How the Liberals could balance the budget—if they have the will

  1. If the government wants to share wealth and show compassion, then by all means do it. But man up and raise taxes accordingly, then face the electorate and justify your reasons.

    Borrowed money is the coward’s way to social change. It doesn’t work and only leads to more pain when the lenders won’t lend anymore, look at Greece.

    • The Canadian government owns a central bank, issues its own currency, and can spend whatever is necessary to build infrastructure, provide services and create jobs for whoever wants one. Greece cannot because it is no longer monetarily sovereign, having ceded its power to the Eurozone. Greece cannot create Euros.

    • Hiking taxes in the end doesn’t achieve anything – high income earners look at their tax bill and the number of hours they work and decide that it is time to cut back on the hours. A friend recently took a lower paid job and magically his take home pay is the same (and he enjoys his work now!)

      The focus should always be on getting more people working and paying taxes right across the board. Unfortunately most of that (training, education, good infrastructure, welfare programs) is the responsibility of the provinces – which the feds already provide transfer money to. So the feds spending more and more money on trying to influence the provinces only results in providing the provinces with more money and little guarantee that they will actually deliver (remember the big ballyhoo about Liberal governments giving the provinces wads of money to ‘improve’ health care – how did that work out?)

      • ” A friend recently took a lower paid job and magically his take home pay is the same ”

        Given that taxes are percentage based, what you described is impossible. Magic indeed.

  2. Despite what most think, bond sales by the Canadian government are a monetary operation, not fiscal. This is explained in the following passage by Australian economist Bill Mitchell:

    “When there are excess reserves [from deficit spending] there is downward pressure on the overnight interest rate (as banks scurry to seek interest-earning opportunities), the central bank then has to sell government bonds to the banks to soak the excess up and maintain liquidity at a level consistent with the [interest rate] target….There is no sense that these debt sales have anything to do with “financing” government net spending. The sales are a monetary operation aimed at interest-rate maintenance.”
    http://bilbo.economicoutlook.net/blog/?p=32703

    A currency sovereign like Canada never has to borrow its own money from the private sector to finance its operations. It has the only source of Canadian dollars: why borrow from others what it can create without limit?

    To echo Larry’s reply, Greece is a currency user (the Euro) and can go bankrupt, like we saw last year, while the Canadian government can never go bankrupt.

  3. “the new Liberal government didn’t really know how it was going to balance the budget” the last government didn’t seem to have a much of clue either especially looking at their history of blowing up Paul Martin’s surpluses into deficits as high as $56B; even when they bore down on the problem, they came up with a plan which if continued as is into 2016 would have produced a $17.4B deficit; they only came close one time by selling off assets such as $3.3B in GM shares which isn’t really a viable plan as it can only be done once. The history of Canada’s budgets going back to the 70s is deficit more than surplus with little correlation between GDP growth and deficit spending. The most one can see is something of a negative correlation for austerity combined with deficit; possibly not surprising as this tends to make government top-heavy, greater policy driven but providing less useful service (yes Virginia, sometimes government can be productive). In any case, the obsession with how much is spent should be very much secondary to how it is spent; or at least we might hope that the focus will shift from branding and PR to actual doing.

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