By Niels Veldhuis
and Charles Lammam
The Fraser Institute
VANCOUVER, B.C. May 17, 2016/ Troy Media/ – As the saying goes, a moving target is hard to hit. That is why repeated shifts in the federal government’s deficit and debt goals over the past six months have been of so much concern. What started as a promise to balance the budget within four years has morphed into a five-year plan of consistent deficits totalling $113 billion.
The federal government’s latest goal – to lower the debt-to-GDP ratio over the next five years – leaves balancing the budget to its next mandate, or a future government.
Given the rapidly evolving deficit and debt goals, should Canadians have faith in the federal government’s latest fiscal targets?
Our view, based on a detailed re-assessment of the federal government’s budget plan, is decidedly not. Federal deficits could reach nearly $200 billion over the next five years along with a corresponding increase in the federal debt-to-GDP ratio.
The main reason for this skeptical view is the lack of consistency in the government’s spending plans.
It is clear, both from the federal government’s rhetoric and recent budget, that it’s committed to significant increases in government spending and believes such spending drives economic growth. That’s why federal program spending (spending minus interest payments on the federal debt) is set to increase by nearly $34 billion or 12.4 per cent over the first two years of the government’s five-year plan.
But after the first two years, the federal government is proposing a major slowdown in spending growth. Specifically, spending is proposed to grow at an average rate of 2.0 per cent during the last three years of its plan – well below the average rate of economic growth (4.3 per cent) and average population and inflation growth (3.0 per cent). In other words, the government plans for a marked expansion of government spending this year and next coupled with a marked decline in relative government spending the following three years.
It’s odd for a government that believes spending drives economic growth to significantly constrain spending growth and thereby decrease the size of the federal government measured as a share of the economy or spending per person (inflation-adjusted).
What happens if the federal government is unable or unwilling to restrain spending growth in the last three years of its plan?
To answer this question, we considered three alternative spending scenarios for the last three years of the government’s plan where spending increases by a) the rate of population growth plus inflation, b) the rate of economic growth and c) by six per cent annually (the average growth rate in spending during the first two years of the five-year budget plan).
Under every scenario, the cumulative federal deficit will be higher than the $113.2 billion currently planned, potentially reaching up to $196 billion ($82.8 billion more than projected in the budget). Moreover, the debt-to-GDP ratio under every spending scenario is greater in 2020/21 than the 31.2 per cent in 2015/16.
The addition of billions of dollars to the federal debt, over and above what’s forecasted in the budget, will place a significant burden on current and future Canadians. For example, interest payments on the federal debt already amount to $25.7 billion annually, more than is spent on Employment Insurance benefits or child benefits. If interest rates go up, the cost of carrying debt will increase and even more money will be re-directed to interest payments.
Lastly, we should not forget that Canada’s economy is expected to continue to grow relatively robustly over the five-year plan. A downturn in the economy or other unforeseen events (i.e. assistance to residents of Fort McMurray) would mean our country’s finances could be much worse than what we forecast above.
That is why strong clear fiscal targets such as balancing the budget in non-recessionary times are so important, have served Canada well, and should be re-established.
Niels Veldhuis and Charles Lammam are economists with the Fraser Institute and co-authors of [popup url=”https://www.fraserinstitute.org/studies/moving-targets-re-estimating-federal-deficits-and-debt-to-gdp-through-2020-21″ height=”1000″ width=”1000″ scrollbars=”1″]Moving Targets: Re-estimating Federal Deficits and Debt-to-GDP through 2020/21[/popup].
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