Betting on fiscal policy is a dubious game, but that’s exactly what Ottawa is doing with higher deficits and more spending in Tuesday’s fiscal update.

By Sean Speer, Nov. 2, 2016

Prime Minister Justin Trudeau famously said that the “budget will balance itself.” At the time, his comment was perceived as a gaffe – more the type of inadvertent misspeak or out-of-context statement that can be unfairly wielded by one’s political opponents than anything else.

We now know it was more than that. Finance Minister Bill Morneau’s fall economic statement confirms that it’s the theory underpinning the government’s fiscal policy. The bet seems to be that more spending and higher deficits will ultimately produce a balanced budget, so there’s no need to fuss too much in the meantime. But the past shows this is a risky bet.

There’s no question that the government had won election in part on deficit spending, but there was still a commitment to “set a timeline for balancing the budget when growth is forecast to remain on a sustainably higher track.”

Remember, March’s budget set out the government’s plan to run budgetary deficits in the short– and medium-term in the name of stimulating economic growth. The $10-billion deficits promised in the 2015 election campaign were projected closer to $30-billion, and the timeline for a return to a balanced budget was delayed. There’s no question that the government had won election in part on deficit spending, but there was still a commitment to “set a timeline for balancing the budget when growth is forecast to remain on a sustainably higher track.”

This budget plan was the subject of some controversy among economists and policy wonks. The case for fiscal stimulus and the utility of deficit spending was debated on comment pages and social media. Some contested that budgetary deficits were justified in a period of sluggish growth. Others argued that fiscal stimulus should be preserved for extraordinary circumstances. But the overplayed disagreement concealed a strong consensus that Ottawa must ultimately implement a clear plan to eliminate its budgetary deficit. Virtually no voices were in favour of deficits for deficits’ sake or returning to long-term deficit spending.

The expectation then was that Mr. Morneau’s fall economic statement would provide clarity on the government’s plan to eliminate its budgetary deficit over the medium-term. Instead, Tuesday gave us something that reflects Mr. Trudeau’s previous formulation about fiscal policy and budget-making.

Virtually no voices were in favour of deficits for deficits’ sake or returning to long-term deficit spending.

The economic and fiscal update basically ignores away the fact that Ottawa is running budgetary deficits and has no clear plan to change its course. Spending is up by nearly $10-billion between 2015 and 2020 and the overall fiscal picture has worsened by $31.8-billion relative to March’s budget.

Most worryingly, the government is basically silent on how or when its budgetary deficit will be eliminated. We’re expected to believe that new infrastructure spending will somehow spur the economy and close the gap between revenues and outlays with little or no action on the part of the government. It’s a matter of rolling the dice.

Yet the facts are less persuasive. The budgetary deficit is now expected to be $14.6-billion in 2021-22 and the document tells us nothing about what is to happen beyond. The result will be seven years of deficit spending with no clear end in sight.

And when one drills down further, there’s reason to be even more skeptical. The fall economic statement has annual spending growth falling from an average of 6.5 per cent from 2015-16 to 2017-18 to 2.4 per cent between 2018-19 to 2021-22, with virtually no explanation. How the government will suddenly exercise such fiscal restraint after growing spending by nearly 20 per cent in three years requires one to strain incredulity. History teaches us that back-end loading tough fiscal choices is not a wise bet.

Betting on fiscal policy is thus a dubious game.

The risk is that we end up in an unvirtuous cycle. “Budget will balance itself” is hardly a new theory. It’s precisely how Canada ended up in a fiscal crisis in the mid-1990s.

Beginning in 1970, the federal government ran budgetary deficits in the name of supporting different economic and social objectives. The problem was that Ottawa could always find new reasons to rationalize new or more spending.

It wasn’t until 1995 when we finally discovered that relying on the budget to balance itself was a bad bet. Eliminating the deficit required a clear plan and the discipline to see it through. The same experience was proven in the recent fiscal period between 2008-09 and 2014-15.

Betting on fiscal policy is thus a dubious game. Rolling the dice on more spending and higher deficits has proven to be a bad fiscal bet over the past 50 years – the government would be wise to exercise caution. Ottawa needs a clear plan to eliminate its budgetary deficit and restore a balanced budget.

Sean Speer is a Munk senior fellow at the Macdonald-Laurier Institute.