OTTAWA – “In every year of our plan, federal debt-to-GDP will continue to fall… In 2019-20, we will: reduce the federal debt-to-GDP ratio to 27 per cent.” – the Liberal election platform.
“We will have a situation where we will be able to reduce our net debt-to-GDP situation during the course of our mandate.” – Finance Minister Bill Morneau said in French at a Feb. 22 news conference after he released a fiscal update.
“Keeping our debt-to-GDP ratio on a downward path throughout our mandate remains a central plank of our economic agenda.” – Liberal MP Leona Alleslev told the House of Commons on Feb 4.
The Liberals’ winning election platform contained two central pledges it described as “fiscal anchors” to guide a Trudeau government’s overall fiscal framework.
One was a promise to balance the federal books in the fourth year of a Liberal mandate.
The other one committed a Liberal government to shrinking the country’s debt-to-GDP ratio to 27 per cent by the end of that four-year term.
“In every year of our plan, federal debt-to-GDP will continue to fall,” said the Liberals’ campaign blueprint.
“Canada benefits from a low debt-to-GDP level and historically low borrowing rates. Our plan ensures that the government of Canada remains in a sustainable fiscal position.”
WATCH: Breaking down the Liberal budget deficit
But earlier this week, Morneau released updated fiscal forecasts for the next two years that now predict debt-to-GDP to increase from 31.0 per cent in 2015-16 to 31.8 per cent in 2016-17, before decreasing to 31.1 per cent in 2017-18.
The projected path of Canada’s debt-to-GDP ratio prompts the questions: Will the Liberals lower the ratio each year and how feasible is it for them to hit the 27-per-cent target by 2019-20?
Spoiler alert: The Canadian Press Baloney Meter is a dispassionate examination of political statements culminating in a ranking of accuracy on a scale of “no baloney” to “full of baloney” (complete methodology below).
This one earns a rating of “some baloney.” Here’s why.
Ottawa calculates its debt-to-GDP ratio by dividing total federal debt by the overall size of the economy, as measured by nominal gross domestic product.
The ratio, also known as the debt burden, represents a government’s capacity to pay back debt. By targeting debt-to-GDP, politicians have more spending flexibility than simply targeting deficits or surpluses. They can run deficits and still reduce the ratio as long as the economy grows faster than the debt.
In recent months, the Liberals started putting more emphasis on the debt-to-GDP vow, as the country’s economic and fiscal outlooks started to sour amid falling oil prices. At the same time, they also started backing away from another vow: capping annual deficits at $10 billion.
WATCH: Morneau says Liberal plan ‘right approach’ facing gloomy economy
Ottawa is now projecting a shortfall of at least $18.4 billion next year – a deficit that’s widely expected to be even bigger in the March 22 budget.
The latest deficit projection, released this week, didn’t account for billions in promised spending the Liberals plan to introduce in order to fund infrastructure projects, which are expected to help boost the struggling economy.
Citing worse-than-expected economic conditions, the Liberals have also cast doubts on whether they can fulfil their fiscal vow to balance the books before the next election.
Facing accusations of breaking promises from opponents, the Liberals have repeatedly pledged to keep pushing down debt-to-GDP every year until the next election.
But in Morneau’s updated projections this week – which only look at the next two years – the ratio is now expected to rise from the 2015-16 level. It is forecast to fall between 2016-17 and 2017-18, but to a level still slightly higher than this year’s ratio.
The day after releasing the update, Morneau also appeared to raise doubts about this second fiscal anchor.
“Our debt-to-GDP ratio is the lowest in the G7,” Morneau told the House of Commons during question period.
“We will invest and this ratio will grow at a lower rate than in the past 10 years.”
WHAT THE EXPERTS SAY
University of Calgary economist Trevor Tombe says it’s entirely feasible that the Liberals will be able to lower the debt-to-GDP ratio to 27 per cent by the end of their mandate.
It will depend, of course, on factors such as how quickly nominal GDP grows and what happens with government revenues and spending, Tombe said.
But from an economics perspective, it’s not really important if the Liberals fall short of fulfilling the pledge, he said. Canada’s ratio is already very low, Tombe noted, and movements of a percentage point or two would have minimal impact on the overall economy.
“It’s really a political question of how they’re going to change their messaging if they don’t feel they’re actually going to hit it,” Tombe said.
It’s more important, he said, for the government to focus on the expected path of future deficits. But he added that there’s no reason to think the federal shortfalls will get out of control.
WATCH: Kevin O’Leary calls Canada’s deficit spending ‘catastrophic’
Stephen Tapp, research director at the Institute for Research on Public Policy, said it’s sensible to try and put the debt-to-GDP on a downward track, as long as it’s fiscally sustainable.
However, Tapp thinks governments should focus on keeping the ratio within a range over a longer period, rather than trying to lower it every year.
It’s easier for a government to control the budget balance than nominal GDP, he added.
“That type of micro-managing is not feasible in practice,” Tapp said.
With the debt-to-GDP ratio poised to rise, it’s doubtful the Liberals will be able to stick to their word and lower it in each of the next few years.
But there’s still time for the Liberals to meet their fiscal anchor of reducing the ratio to 27 per cent by the end of their mandate.
For that reason, the Liberal position rates “some baloney.”
The Baloney Meter is a project of The Canadian Press that examines the level of accuracy in statements made by politicians. Each claim is researched and assigned a rating based on the following scale:
No baloney – the statement is completely accurate
A little baloney – the statement is mostly accurate but more information is required
Some baloney – the statement is partly accurate but important details are missing
A lot of baloney – the statement is mostly inaccurate but contains elements of truth
Full of baloney – the statement is completely inaccurate