Liberals risk credibility with adjustment to new fiscal target

The Liberals are suddenly talking about the debt-to-GDP ratio, promising to keep it on a downward track every year until 2019


OTTAWA — Now that the federal Liberals have shied away from their vow to keep annual deficits under $10 billion, they’ve latched on to another fiscal target — and this one will be much easier to meet.

The new government is suddenly talking about the debt-to-GDP ratio, promising repeatedly to keep it on a downward track every year until the next election.

The government calculates its debt-to-GDP ratio by dividing total federal debt by the overall size of the economy, as measured by nominal GDP.

It represents a government’s capacity to pay back debt — and focusing on it gives politicians more spending flexibility.

By targeting debt-to-GDP, the Liberals could instead be prepared to run annual deficits of up to $25 billion in the coming years and still lower the ratio — as long as the economy grows at a decent pace, economists say.

“The government does have a fair bit of room if what they’re trying to do is just see the debt-to-GDP ratio go down,” said Mike Moffatt, who teaches economics at the University of Western Ontario’s Ivey Business School (and is a contributor to macleans.ca).

The adoption of the debt-to-GDP ratio as a “fiscal anchor” is not new. It was mentioned in the Liberal election platform as one of the ways to keep spending under control. The campaign rhetoric, however, largely focused on the $10-billion annual deficit.

No longer.

With uncosted election promises piling up on top of unforeseen shortfalls in the underlying fiscal plan, Prime Minister Justin Trudeau has emphasized the more-reachable fiscal anchor in recent days.

“We will continue to decrease (the debt-to-GDP ratio) every single year because that’s important for the fiscal health of our country,” Trudeau said Wednesday, after casting further doubt on the $10-billion annual deficit target because of economic challenges.

“We always targeted modest deficits, we had hoped it would be around $10 billion — we will see if we will be able to hold at that level.”

Plain old math dictates the ratio can continue to fall even if the public books slide into the red — at least to a point.

That’s because even if the federal debt gets fatter, the ratio will edge downwards if the economy is growing faster than the debt.

Still, in an economy battered by low commodity prices, the debt-to-GDP promise doesn’t exactly look like a slam dunk, either.

Earlier this month, projections by the parliamentary budget office suggested the government could find itself running annual deficits up to $15 billion once the Liberals’ costed, big-ticket election promises are factored in. On top of that, the party has also made several uncosted vows.

Then, this week, the Liberals conceded their new tax package will, in fact, drain more than $1 billion net from the treasury each year.

At the same time, economic growth is sluggish.

When considering the forecasts, Scott Clark — a former deputy minister of Finance — believes the Liberals will already be close to the threshold that would start ratcheting up the debt-to-GDP.

“Then you’ve got a serious problem because then no one’s going to believe you,” Clark said of the danger of not living up to the goal.

“Your credibility will go straight out the window because if you’re going to have an anchor … you have to live up to it. As soon as you break that, the financial markets will come down on you like a ton of bricks.”

The Liberal platform, which helped carry the party to victory in October, also contained a second fiscal anchor: balancing the federal books by the fourth year of its mandate.

But experts believe balancing the 2019-20 budget poses a big hurdle unless the government cuts spending or hikes taxes — or both — to overcome the weaker-than-expected economy and the pricey basket of electoral promises.

Many experts like Clark argue that lowering the debt-to-GDP ratio is a more-appropriate — and achievable — commitment for a government than a balanced-budget anchor.

The government projects the ratio will gradually fall each year from 31.1 per cent in 2015-16 to 25.2 per cent in 2020-21.

But Don Drummond, a former senior Finance Department bureaucrat, questioned the importance of striving to drop an already-low ratio that’s much lower than it’s been in the past.

“Who knows whether it even needs to be brought down?” said Drummond, who was assistant deputy minister of fiscal policy in the 1990s when the ratio was close to 70 per cent.

“There’s nothing in the economic literature that drives you towards the notion of an optimal debt-to-GDP ratio…I think it’s a second choice on their part when they can’t produce the deficit target that they want. This is kind of a defensive mechanism.”

Economist Moffatt, who stress-tested the fiscal numbers in the Liberals’ election platform, said if nominal GDP growth returned to a more-normal level in the coming years — of about 3.5 or four per cent — then the government could probably run deficits up to $25 billion without pushing the ratio up.

For 2015, the government only expects nominal GDP to grow by 0.9 per cent largely due to the squeeze of low oil prices, according to its fall fiscal update.

That projection, an average of private-sector forecasts taken in October, also called for a turnaround of 4.1 per cent growth in 2016, 4.6 in 2017 and 4.4 in 2018.


Liberals risk credibility with adjustment to new fiscal target

  1. Smoke and Mirrors we want a real number for the deficits the Libranos are going to run not some percentage………….

    • Joe,

      Just the promises Trudeau has made to the natives will be far more than 10 billion a year. I suspect the Inquiry for missing or murdered aboriginal women (hint: It is aboriginal MEN who are making them missing or murdered in the vast majority of cases) will cost $400 to $500 million after the first year.

      Remember this though: “There is no amount of YOUR money that a Liberal won’t spend to guarantee that he/she remains in power”

      sadly, to do this they take from people who contribute, and promise it to those who don’t contribute; but who know how to vote for their own freebies.

      The question however, is how much damage will Trudeau V 2.0 inflict before enough people give him the heave ho.

  2. For ten years the CONS did their best to wreck the country and the media said very little.

    The Liberals have been in power for ……what?…….A month……And already you are questioning their credibility??

    Those post dated cheques from CON HQ must still be coming in eh! ?

    • “For ten years the CONS did their best to wreck the country and the media said very little.” – Would Donald Trump say something like that… eg “For 6 years Obama/democrats did their best to wreck…”?

      Obviously both sides are not doing the best to wreck economy, Canada’s debt did not grow as fast as most of western world, economy was not overall worse than places like US.

    • Give it a rest Em! Had “Harp” gone from a promise of a 10 billion dollar deficit to a 25 billion dollar deficit within the first months of being in power your head would have exploded all over the pages of Macleans online. Do not expect anyone to give JT a break because he made promises he is not keeping. Buck up and suck it up just like you dished it out for many years.

      • LOL this kind of whining and bitching and utter ignorance is what got you CONS kicked out in the first place.


  3. The problem with Debt to GDP is by spending lots of money you can artificially *short term* boost the GDP which makes ratio look better than it is. See Greece as example, the GDP grew rapidly as the debt did, till the ponzi scheme collapsed.

    • Once Greece collapsed it was the people on social assistance who suffered the most, and they only manage because of bailout. Problems continue even today, always need another bailout.

      If Canada goes bankrupt, no one will be left to bail Canada out like Greece. US is in worse shape right now, so is Ontario, California, New York, lots of cities, etc.

      • Economics is simple… you don’t spend more than you take in, unless you have a good reason that will improve your future income, or some sort of short term emergency. Alternative is in effect selling your future and kids future to slavery.

  4. I see that the government is trying to shoot a moving target and it has figured out very much late in the day that the target is indeed moving. And it doesn’t have the proper arms or ammunition. And neither are there any experts in the field, surrounding this Government. So it has begun to resort to disingenuity.
    Let’s see how all this works:
    Controlling the expenditure won’t be easy only because we dared to make promises about things that we really didn’t understand much. The annual deficit will certainly reach 25 billion instead of 10 billion. So, let us prove to those fools who pass for the citizens of this country that more is merrier. The more you spend the better you become in controlling the expenditure. To demonstrate our skills in Voodoo, let us bring in a new debt/GDP ratio and claim that compared to the annual income the deficit has actually come down.
    But it just won’t happen if you know how to add or subtract correctly. The problem will persist and get worse, no matter however much you tinker with numbers. Borrowed spending doesn’t make anything grow anywhere, except of course for the crushing debt load. Poor souls! When you spend more, you have to borrow more. Then the interest payment alone will balloon and become uncontrollable. At this point, obviously, you will have demonstrated that you have no intention of repaying any of these loans, regardless of these are foreign or local ones. With a series of downgrading of the credit rating, you might have just managed to “cut and paste” Greece onto the map of North America. Your bonds will become just a heap of junk. Foreigners will unload these in massive quantities. Locals will suffer immense losses on their holdings in their meagre savings. Stock markets will nose dive. After a massive bleeding, the foreign exchange situation will be just the same as the one of any of the poorest third world countries. Regardless of however much you shake your head, at some point, the taxes will have to shoot up through the roof. Still if you are shrewd enough like the Greek Prime Minister, you can refuse to budge and declare “after me, the deluge”. At this point your unrelenting rhetoric will match your unfathomable undoing to the economy. As in Greece, the masses will be impressed by your standing up to the foreigners and declare that we shouldn’t pay any of the foreign debts at all. Totally enthralled, they will celebrate you as their heroes and emancipators for doing just that. Our manufacturing base might shrink. We might suffer massive unemployment despite the Government’s massive spending on propping up its minions and unions. But who cares! With the help of the stupid press prostrated at your feet, everything will be hunkee doree. Kim Jong Un will easily be supplanted by your boss as the world’s strongest leader who stood up against the evils of capitalism. There will be no need for anymore elections, let alone the proportional tinkering.
    There is a catch to all this though! North Korea can afford to bully South Korea into coughing out a few hundred billions every now then. Greece can bilk Germany and EU for couple of trillions. But whom can we bring into submission? Do you think that US might get terribly scared at the prospects of its NORAD defenses evaporating into thin air without a strong Canada? Do you think they will come running to us begging us to let them save us? Do you think they will be forced to cough out a couple of trillions every now and then?
    You see, the Greek Prime Minister himself, when he faced the reality that he cannot deliver what he promised, went back to the electorate for a new mandate. He did have to bleat out a lot of lies to his electorate, but nevertheless he did have the courage to go back before them. Can you at least, do the honorable thing like him? No, you can’t. Only thing you can match him is in spreading misinformation. Beyond that, you are parting ways with him.
    Can I, please, suggest a more efficacious solution: Why don’t we use that 25 billion each year for booking with Sir Richard Branson, flights to Mars for all Canadians? I am sure that just as in the Hermit Kingdom, we will be past the point of no return and no one will be able to figure whatever we are up to there!, And that alone should bring us closer to eternal bliss!

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