Doubling down on deficits

In my previous post here, "Camp Justin", I stated that the Trudeau Liberals were "promising to carry on with what they've been doing for the past four years, running fiscal deficits in order to offer a little of everything."  Now the party has released its full election platform, spelling out the full cost of doing more of the same for another four years.  It's quite an eye-opener.

Recall that in the 2015 election campaign, Justin Trudeau pledged to run modest deficits to get the economy moving again, with a timetable to restore balance by 2019.  He has often stated that he believes it was this pledge that won him that election.  That belief is about to be put to the test, because the platform for the October 21 vote calls for much larger deficits, and this time with not even a hint of a plan to get back to balance.

Specifically, the plan calls for new spending -- sorry, "investments" -- of C$ 9.3 billion in 2020-21, rising to $17 billion by the fourth year of the new mandate.  The Federal deficit, which was only boosted to $ 14 billion in the last fiscal year by some year-end accounting trickery, is projected to jump to $27 billion in 2010-21, then edge lower to $21 billion by 2024, a projection that requires some frankly heroic assumptions about revenue growth.  The Federal debt/GDP ratio is projected to edge down from just below 31 percent currently to just above 30 percent by 2024.

There was a clear case for deficit spending in 2015.  The economy was still having trouble gaining traction in the wake of the global financial crisis, and there was little scope for further monetary stimulus.  The case for even bigger deficits now is rather weaker.  The economy is, in the estimation of the Bank of Canada, operating close to potential, with little slack in the labour market and at least some signs of rising inflationary risks. Trudeau's calculus here is now nakedly political, rather than economic.

Will it work?  Even before the full platform was unveiled, the Tories had been seeking to portray Trudeau as a spendthrift.  Over the next few days, once the Tories and their ad agency have had a chance to work through the details of the Liberal plan, we can expect a whole lot more attacks along those lines.  The contrast with the Tories own fiscal plans, which call for the budget to be returned to balance by 2014, will surely be brought into sharp relief.

One argument the Tories will certainly try to use is that by boosting deficits now, a Liberal government would leave itself no ammunition to fend off the next economic downturn.  This does not make a whole lot of sense in today's context.  With inflation not really an issue, it must be  better to use fiscal and monetary measures to prevent or at least indefinitely delay that downturn, rather than hold off and then have to deal with all the problems that recessions bring.  But even if the deficits are not dangerous in themselves -- and they're not -- can voters be persuaded to accept the prospect of several more years of deficit spending when they see that money is being borrowed to finance fripperies like camping "bursaries"?  Stay tuned.