Debt and deficits: Where the parties stand on balancing the books in Canada

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Canadian politicians love comparing balanced budgets to a household balancing its chequebook, but economists say the comparison is misleading and that smaller deficits are now like the new balanced budget.

The main parties are also no longer as rigid about maintaining balance. In fact, regardless of whom you vote for on Oct. 21, no party has a plan to balance the budget in its first term in office.

Kevin Milligan, a professor of economics at the University of British Columbia, says focusing on maintaining a sustainable debt-to-GDP ratio is more important than returning to zero balance.

“People look at public finances as if it’s their own households,” Milligan told Global News. “One of the big differences is, for a household, you tend to take on some debt and then spend the rest life paying it off, so you can have a comfortable retirement.”

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Countries, obviously, have much longer lifespans. And as long as the rate of economic growth exceeds the budgeted deficit, running smaller deficits is not a huge concern, Milligan said.

He noted that Canada would need to add $800 billion of debt to get back to the crisis of the 1990s.

“You don’t want to take on too much debt because it could have a negative reinforcing spiral of interest payments leading to a problem,” he said. “But we are nowhere close to that.”

The current national debt sits around $685.5 billion as of March 31, 2019, according to Finance Canada, with the federal debt-to-GDP (gross domestic product) ratio hovering around 30.9 per cent, down from 31.3 per cent the previous year.

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Canada currently has the lowest debt burden among G7 countries and the public debt charges amounted to 6.7 per cent of expenses in 2018–19, down from a peak of nearly 30 per cent in the mid-1990s.

This means for every dollar of debt, Canada is spending roughly seven cents servicing it. In the 1990s, Canada was paying closer to 30 cents.

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And when it comes to deficits, Ottawa posted a $14-billion deficit in 2018-2019, which relative to a roughly $2.3-trillion economy, could lead to further reductions in the federal debt-to-GDP ratio.

Moshe Lander, an economics professor at Montreal’s Concordia University, said talk of balancing the books is often “good politics but not necessary economics.”

“It’s not something that any politician would feel comfortable saying in front of an open mic,” Lander said. “They’ll sell it to the public on the grounds that you or I have to balance their budget and the government has to balance theirs.”

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The messaging around the importance of fiscal balance is also changing among the party leaders.

Lander pointed to Liberal Leader Justin Trudeau, who promised in 2015 to balance the budget by 2019, but broke that promise and has posted deficits each year. And now the Conservative Leader Andrew Scheer, who originally promised a balanced budget in his first term, has now moved the goal posts to five years.

“In Canada there is plenty of room to run a deficit without causing a panic in the bond market or a loss of international confidence,” Lander said.

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Mostafa Askari, chief economist at the University of Ottawa’s Institute of Fiscal Studies and Democracy, said comparing Canada’s finances to household debt is an apples-to-oranges comparison.

“There is really no major economic argument for supporting a zero balance,” he said. “It doesn’t mean you can run off deficits forever, but some people are obsessed with it.”

“Small deficits are like a balanced budget.”

While it’s true that money that goes to servicing the debt could be directed to social programs, 70 per cent Canada’s debt is domestic, according to Askari, meaning the majority of the money borrowed comes from pension plans and Canadian bonds.

“Sometimes when people talk about repaying the debt they talk about it as if it’s evaporating into the air,” he said. “It’s actually going back into the system, back to Canadians.”

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Despite what experts say, a balanced budget appears to be important to voters.

A new Ipsos poll, conducted exclusively for Global News between Oct. 4 and Oct. 7, found that 77 per cent of respondents said it’s important that the next government balance the books and not run a deficit.

Conservative voters (82 per cent) were more likely to agree with this priority, while Liberals (66 per cent) less so. A majority of NDP (73 per cent) and Green voters (71 per cent) also agreed.

When it came to prioritizing a balanced budget over other options, the poll found Canadians weren’t on the same page. Roughly 31 per cent said balancing the budget is the top priority, even if it means spending cuts or tax increases. Thirty-six per cent said that lower taxes was more urgent, even if it means continued deficits or cuts.

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Another 33 per cent said that investing in government programs is the priority, even if it means no tax cuts or continued budget deficits. The poll involved interviews with more than 1,500 Canadians online and is accurate to within 2.9 percentage points, 19 times out of 20.

Meanwhile, credit rating agencies have warned Ottawa that continuing to run deficits could make Canada more vulnerable in a recession.

Fitch Ratings Inc. warned in March that the country’s debt levels are higher than other top rated countries and that the combined federal and provincial debt is close a level that’s “incompatible” with a triple-A rating.

“Canada’s gross general government debt, combining federal and provincial fiscal accounts, is higher than other ‘AAA’ rated sovereigns, excepting the U.S, and remains close to a level that is incompatible with ‘AAA’ status,” the report said.

 

© 2019 Global News, a division of Corus Entertainment Inc.

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