The Trudeau government’s short-lived ‘fiscal anchor’

Only two months after introducing it, the Trudeau government abandons its “fiscal anchor” commitment


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 trudeau fiscal anchor

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By Ben Eisen
and Charles Lammam

The Fraser Institute

VANCOUVER, B.C. Feb 26, 2016/ Troy Media/ – During last fall’s federal election, the Liberals campaigned on a [popup url=”” height=”1000″ width=”1000″ scrollbars=”0″]commitment[/popup] to run budget deficits for its first three years, while promising that the size of those deficits would be capped at $10 billion. The government also pledged to return to budget balance by 2019/20. Since then, the goalposts have moved repeatedly, as deficit projections have been steadily revised upward.

In December, Finance Minister Bill Morneau backed off of his party’s $10 billion deficit cap, replacing this “limit” with a new one, pledging to keep deficits small enough for the federal debt-to-GDP ratio to shrink every year.

The government repeatedly referred to its new limit as a “fiscal anchor” that would be used to prevent rapid deterioration in its fiscal position. In fact, Prime Minister Justin Trudeau, back in December, said: “We will continue to decrease (the debt-to-GDP ratio) every single year because that’s important for the fiscal health of our country.”

Only two months later, the “fiscal anchor” has been abandoned, as the government’s latest [popup url=”” height=”1000″ width=”1000″ scrollbars=”0″]economic outlook[/popup] shows that the federal debt-to-GDP ratio will in fact increase next year. (Recent [popup url=”” height=”1000″ width=”1000″ scrollbars=”0″]musings[/popup] have also put the promised return to a balanced budget by 2019/20 in question.)

Specifically, the government now expects the federal debt-to-GDP ratio to increase from 31 per cent this year to 31.8 per cent in 2016/17. And this expectation is before the Liberals add their new major spending initiatives to the mix.

Once new major spending is factored in (expected to be upwards of $10 billion next year alone), the annual deficit is likely to be more than $25 billion and the federal debt-to-GDP ratio will increase even more.

trudeau fiscal anchor
Abandon ship!

The short life of the government’s latest “fiscal anchor” illustrates the dangers of constantly evolving fiscal targets, and the need for transparent, durable, and easily understood fiscal norms.

Unfortunately, recent years have seen the steady destruction (by governments across the country) of one such useful norm: the principle that governments should balance their books during “normal” economic times, and only resort to deficit spending during economic downturns. This principle took hold during the 1990s when governments across the country averted a fiscal crisis by taking decisive action to rein in government debt that had been accumulating for decades because of routine deficit spending.

In the following years, having lived with the consequences of runaway debt and having made hard choices to get it under control, Canadian governments generally avoided running deficits during periods of economic growth. This approach to fiscal policy helped create the conditions for a prolonged period when the economy boomed and the mountain of public debt accumulated over the preceding decades steadily shrank.

Unfortunately, in recent years, policymakers across Canada have abandoned the long-standing norm that deficit spending – particularly in the name of “stimulating” the economy – should be reserved for steep economic downturns.

The problem with unwritten fiscal norms (such as the one that governments generally ought to balance their budgets) is that they take a long time to develop and cement. Once the goalposts are moved, and an easily understood and long-standing fiscal principle is repudiated, it becomes much easier for governments to move them again.

And this is precisely what has happened. The $10 billion deficit cap that replaced a simple balanced budget target barely survived the election before it was replaced with the declining debt-to-GDP fiscal anchor. And this latest “limit” was even more short-lived.

Critically, all this is happening at a time when the federal government expects positive (albeit modest) economic growth next year. The recent economic outlook projects nominal GDP, the broadest measure of the government’s revenue base, to grow 2.4 per cent in 2016 – this after including a conservative “forecast adjustment” that reduces the expected level of GDP by $40 billion.

The prevailing view that governments should avoid routine budget deficits has served Canada well, but it has now been largely abandoned by the federal government, and the hastily assembled fiscal anchors designed to replace it have proven mostly useless.

Ben Eisen is associate director of provincial prosperity studies and Charles Lammam is director of fiscal studies with the Fraser Institute.

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One Response to "The Trudeau government’s short-lived ‘fiscal anchor’"

  1. Avatar
    Larry Kazdan CPA, CGA   February 28, 2016 at 5:56 am

    Unlike households, businesses or provinces, the federal government is a currency issuer that owns a central bank and can spend without first having to get funds from elsewhere.

    Consequently if there are real resources unused by the private sector, the federal government has the fiscal capacity to employ them for public purposes such as the provision of services, infrastructure renewal, and achieving full employment.

    The belief that government must restrict its spending to some arbitrary number or ratio is a holdover from the gold standard era when governments could run out of bullion and fail to pay their debts. Today the myth lingers on, fomented by those ideologically inclined to restrict government activity.

    Trudeau’s real failure was promising to balance his fourth year budget and to decrease the debt-to-GDP ratio. These are conventional measures which have no justification other than outdated dogma, and which will compromise his ambitious agenda to deliver social justice within a productive economy.


    1. Our Sovereign Fiat Currency System and Our Inability to Involuntarily Run out of Money

    “In 1971 the Nixon administration abandoned the gold standard and adopted a fiat monetary system, substantially altering what looked like the same currency. Under a fiat monetary system, money is an accepted medium of exchange only because the government requires it for tax payments. Government fiat money necessarily means that federal spending need not be based on revenue. The federal government has no more money at its disposal when the federal budget is in surplus, than when the budget is in deficit. Total federal expense is whatever the federal government chooses it to be. There is no inherent financial limit. The amount of federal spending, taxing and borrowing influence inflation, interest rates, capital formation, and other real economic phenomena, but the amount of money available to the federal government is independent of tax revenues and independent of federal debt.”

    2. Crikey, why is it is honourable to deliberately increase unemployment?
    Australian economist William Mitchell

    “The public debt level relative to GDP is not a matter of economic concern ever if the government in question issues its own currency and only issues debt in that currency.

    Under those circumstances the government can always service its nominal liabilities and the public debt ratio is an irrelevant focus of attention.

    At any time of its choosing, the government could cease to issue public debt and continue deficit spending at will. It might have to change some regulations and statutes which have been put in place to give the impression that the debt issuance is funding its net spending, but that would be merely legislative activity.

    Remember the government just borrows back what it spent in deficit in a previous period. Bond sales draw on private saving which is just a reflection of past deficits.”

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