Prime Minister Justin Trudeau in March became the first leader in a generation to plunge the federal government into deficit without remorse. He would still like you to consider him a fiscal conservative. “One of the things that is important to me is fiscal responsibility,” Trudeau told Bloomberg a week before Finance Minister Bill Morneau tabled his first budget.
The Prime Minister will struggle to convince people of his concern for the sanctity of the public purse. His decision to drop the eligibility for collecting old age security benefits from 67 to 65 was foolish, not fiscally responsible. Almost every neutral expert who has considered how to save the public retirement system concludes that future generations should wait longer for their benefits. Few governments have managed to make such a change; Trudeau had it handed to him but opted to backtrack. It undermines his claim to being an “evidence-based” policy-maker.
Also working against Trudeau’s claims of fiscal prudence is the $29-billion deficit forecast for this year. That’s a big number for a country that has been conditioned to think that even the smallest budget deficit is automatically bad. It is entirely possible that there will still be a budget shortfall when Trudeau seeks re-election in five years.
Most of the people who voted for the Liberals last autumn probably don’t care about Trudeau’s credentials as a fiscal steward. That doesn’t mean Trudeau can do what he wants with his mandate to spend. The Conservatives will continue to criticize deficit spending, if only because they will be unable to admit they lost the debate over economic policy. Trudeau and Morneau also must keep in mind the buyers of Canada’s bonds. Bay Street is broadly supportive of the theory behind borrowing to spark economic growth. But there are limits. “An implicit, if not explicit, target of zero [deficit] would be welcome news,” Royal Bank of Canada economists said before the budget. They didn’t get that. The projected shortfall in 2021 is $14.3 billion.
Trudeau knows he will be watched closely. “Someone who actually believes that government has an important role to play, not in everything but in certain areas and conditions for growth, has a strong vested interest in being responsible, and demonstrating that governments can spend and invest and be responsible stewards of taxpayer monies,” Trudeau said during his Bloomberg interview.
The Prime Minister and the finance minister have done a good job of focusing the public’s attention on the debt-to-GDP ratio, a better gauge of a country’s ability to pay its bills than the annual budget balance. Canada’s debt is currently about 31 per cent of GDP. That is comfortably low, and it is why Trudeau is in a position to borrow to spend on infrastructure. Morneau aims to return the debt-to-GDP ratio to that level within five years, after a small increase. Those looking for an anchor on spending will have to live with that for now.
Does that make Trudeau a fiscal conservative? In a way, yes. Warren Lovely, head of public sector research at National Bank, wanted the government to chuck both balanced budgets and its campaign promise to reduce debt as a percentage of the economy. Trudeau and Morneau opted to keep a target—albeit a less restrictive one than Stephen Harper’s arbitrary goal of banishing deficits. The whole point of legislating budget surpluses was to reduce debt to manageable levels that would allow the government to borrow at lower interest rates, and that’s what happened. Balanced budgets became a political trope that falsely equated a clean balance sheet with economic success. A focus on the debt-to-GDP ratio puts attention on what matters (debt) while allowing politicians to adapt to changing economic conditions.
That won’t free Trudeau from accusations that he is a spendthrift. He plans to scrap the balanced-budget law, when he could have replaced it with a legislation enshrining a debt-to-GDP target. That would be the easiest way to change the definition of a fiscal conservative. The other way will be more difficult: He will have to win a second term.