Liberals carrying two deficits: fiscal and credibility
Would it have killed them to promise a fiscal anchor with enough weight to keep the Ship of State from drifting out to sea? A statutory commitment to keep the deficit below one per cent of gross domestic product, say, or a rainy-day fund of $3 billion that would be used for debt if unneeded?
The prospect of wider deficits has dominated coverage of the Liberal platform. A press corps that came of age during the slaying of the deficit dragon a generation ago is understandably shocked by the site of a governing party fattening a new beast for no apparent reason other than re-election. “When government revenues start drying up, and the debt-to-GDP level rises, the Liberals’ last fig leaf of fiscal respectability will be blown away,” the National Post’s John Ivison wrote.
There are things to like about the Liberal agenda.
For example, the Career Insurance Benefit, which would provide the long-term unemployed with as much as $15,900 over two years after their employment insurance runs out, recognizes that a modern social safety net must catch those who struggle to make the jump to the new economy, where growth is driven by technology and services, unlike the one we knew, which was organized around the production of goods.
The offer to conduct a “comprehensive review” of government spending and tax expenditures to “ensure that wealthy Canadians do not benefit from unfair tax breaks” could work as a substitute for the comprehensive review of the tax code that almost every business lobby has said is necessary to improve competitiveness.
So the ideas are there. The problem is the writers and approvers of the platform seem to think Team Trudeau still has the credibility to convince us that it will execute them.
If I had walked away from a pledge to balance the budget; broken a promise to overhaul the voting system; failed to allocate tens of billions of dollars of infrastructure money; preached diversity, then ingloriously taken the advice of my white, mostly male advisers over that of the Indigenous woman I chose to be my attorney general; and hidden my own history of unconscious racism while ridiculing that of others; I might think I owed the public something more than my word.
Not Justin Trudeau. He’s got this. Why? Because Doug Ford.
So the ideas are there, but the writers and approvers of the platform think Team Trudeau still has the credibility to convince us it will execute them
Let’s start with the deficits.
“Hold onto your wallet,” Pierre Poilievre, the Conservative finance critic in the previous Parliament, tweeted after the Liberals proposed running deficits of $27.3 billion, $23.7 billion, $21.8 billion, and $21 billion over the next four years. (The debt-to-GDP ratio would pop to 30.9 per cent, and then decline to 30.2 per cent by 2024.)
That’s a distraction from the real reason to be discouraged by the Liberal plan. Trudeau wouldn’t need to raise taxes, not while the Government of Canada can borrow for 30 years at an interest rate of 1.4 per cent and nominal GDP is growing about four per cent a year. As long as economic growth continues to race ahead of interest rates, the only reason to raise additional revenue would be if you have an ideological commitment to balanced budgets. Trudeau has no such commitment.
“With the real cost of long-term borrowing close to zero, this is a good time for governments to borrow to finance real investment that would benefit future generations,” Scott Clark and Peter Devries, former Finance officials who now work as consultants, wrote on their blog. “This is the public finance principle underlying the Liberal policy platform.”
But just a minute. Trudeau’s Liberals have always been good at ideas; it’s execution where they so often come up short.
There are hints in the platform that they may have learned some things about governing. The infrastructure program fell flat because Ottawa and the provinces bickered over how to spend the money. If Trudeau gets a second mandate, he says the provinces will have two years to draw up a list of worthy investments, and, if they don’t, he will send the funds directly to municipalities.
Clever plan, but why didn’t someone think of that four years ago? Same for inter-provincial trade. The Liberals say they would create a Canada Free Trade Tribunal to “hear, investigate, and help resolve cases where domestic barriers may exist.” Fine, but where was that initiative when the country was prepared to do anything to offset the trade war with the Trump administration?
Many of the initiatives are ‘operational.’ They do not lead to increasing long-term productivity and economic growth, and they should not be financed by running deficits and higher debt.
consultants Scott Clark and Peter Devries
In its latest assessment of Canada, the International Monetary Fund nudged the Trudeau government to “explicitly incorporate a fiscal rule” in order to “enhance the credibility of fiscal policy.” The IMF favours rules that are easy to communicate because they bolster confidence. Dozens of countries have them. For Canada, it suggested a clear promise to return net debt to its pre-crisis level of 28 per cent of GDP combined with a cap on spending.
The government ignored this advice, and Trudeau would continue to shun clarity in a second term. The Liberal platform commits only to keeping the debt-to-GDP ratio on downward slope and to preserve Canada’s triple-A credit rating. That might be believable if the Liberal wish book weren’t so cluttered with sops to first-time homebuyers, entrepreneurs and campers.
“Many of the proposed initiatives in the Liberal platform are ‘operational’ in nature,” Clark and Devries wrote. “They do not lead to increasing long-term productivity and economic growth, and they should not be financed by running deficits and higher debt.”
If the Liberals win the election, they will have two deficits: fiscal and credibility. They can get away with ignoring the first one, but only if they do something about the second.