The reluctant spendthrifts

An emerging theme in the Canadian Federal election campaign that just got underway is fiscal discipline. The Tories are running a TV spot correctly accusing Justin Trudeau of having no plan to return to a balanced budget even in his second term of office, even though he won the 2015 election in part by promising to achieve a zero deficit by this year. Not that the Tories are any better: their leader Andrew Scheer has abandoned a pledge to move quickly to balance the books. He now promises to do so in five years -- which takes us past the next election.

Today the Department of Finance published its Annual Financial Report for the fiscal year 2018-19, which ended in March. The numbers are enlightening, in terms of how they compare to the campaign rhetoric, how they compare to the past, and how they show Canada in the international context. 

The final outcome for the fiscal year was a deficit of C$ 14 billion, just a shade below the $14.9 billion estimated on budget day back in March. The thing is, for most of the fiscal year, the government was running at or close to a zero deficit; it was only a big spike in spending for March that pushed the number higher.  This happens every year as governments try to book expenditures they have promised to make, even if the actual disbursements don't occur at the time.  It would have looked odd for the Trudeau Liberals to be claiming to be using fiscal policy to support the economy if the budget was in fact close to balance.

The relatively favourable outcome reflected faster growth in revenues (up 6.7 percent) than in either program spending (up 4.7 percent) or public debt costs (up 6.3 percent).  The notably slow growth in program spending reflects widely-reported difficulties in carrying out some of the Government's pledges, especially in areas such as infrastructure where other levels of government have been slow to provide matching funding.  As for public debt charges, these now account for less than 7 percent of all spending, down from more than 30 percent in the fiscal dark ages of the mid-1990s.

Canada's public debt-to-GDP ratio now stands at 30.9 percent.  This is the lowest figure for any G7 country and less than half the G7 average, though it should be kept in mind that the average is boosted by the very high indebtedness of Japan and Italy.  It should also be kept in mind that Canada's Provinces also have debts of their own, with Ontario a particular deadbeat, so the fiscal situation for the entire public sector is not quite as rosy as today's data suggest.

Justin Trudeau was widely scorned back in 2015 for suggesting that if the economy grew, "the deficit will take care of itself".  That line is already being used against him in the current campaign, but the fact is that the numbers prove that to a great extent, he was right. The Tories will still paint him as a spendthrift, but the data say otherwise.