Debt and deficits: Where the parties stand on balancing the books in Canada

Click to play video: 'Money123: What are the federal parties’ tax pledges?' Money123: What are the federal parties’ tax pledges?
WATCH ABOVE: What are the federal parties’ tax pledges? – Oct 5, 2019

Canadian politicians love comparing balanced budgets to a household balancing its chequebook, but economists say the comparison is misleading and that smaller deficits are now like the new balanced budget.

The main parties are also no longer as rigid about maintaining balance. In fact, regardless of whom you vote for on Oct. 21, no party has a plan to balance the budget in its first term in office.

Kevin Milligan, a professor of economics at the University of British Columbia, says focusing on maintaining a sustainable debt-to-GDP ratio is more important than returning to zero balance.

“People look at public finances as if it’s their own households,” Milligan told Global News. “One of the big differences is, for a household, you tend to take on some debt and then spend the rest life paying it off, so you can have a comfortable retirement.”

Story continues below advertisement

WATCH: Party leaders make major promises on taxes

Countries, obviously, have much longer lifespans. And as long as the rate of economic growth exceeds the budgeted deficit, running smaller deficits is not a huge concern, Milligan said.

He noted that Canada would need to add $800 billion of debt to get back to the crisis of the 1990s.

“You don’t want to take on too much debt because it could have a negative reinforcing spiral of interest payments leading to a problem,” he said. “But we are nowhere close to that.”

Click to play video: 'Federal parties willing to run deficits for years: Could that hurt future generations?' Federal parties willing to run deficits for years: Could that hurt future generations?
Federal parties willing to run deficits for years: Could that hurt future generations? – Oct 10, 2019

The current national debt sits around $685.5 billion as of March 31, 2019, according to Finance Canada, with the federal debt-to-GDP (gross domestic product) ratio hovering around 30.9 per cent, down from 31.3 per cent the previous year.

Story continues below advertisement

REALITY CHECK: Trudeau claims Scheer is giving Canada’s wealthiest a $50,000 tax break

Canada currently has the lowest debt burden among G7 countries and the public debt charges amounted to 6.7 per cent of expenses in 2018–19, down from a peak of nearly 30 per cent in the mid-1990s.

This means for every dollar of debt, Canada is spending roughly seven cents servicing it. In the 1990s, Canada was paying closer to 30 cents.

Should Canadians be worried about the debt the government has accumulated?
Click to play video: 'Should Canadians be worried about the debt the government has accumulated?' Should Canadians be worried about the debt the government has accumulated?
Should Canadians be worried about the debt the government has accumulated? – Oct 10, 2019

And when it comes to deficits, Ottawa posted a $14-billion deficit in 2018-2019, which relative to a roughly $2.3-trillion economy, could lead to further reductions in the federal debt-to-GDP ratio.

Moshe Lander, an economics professor at Montreal’s Concordia University, said talk of balancing the books is often “good politics but not necessary economics.”

Story continues below advertisement

“It’s not something that any politician would feel comfortable saying in front of an open mic,” Lander said. “They’ll sell it to the public on the grounds that you or I have to balance their budget and the government has to balance theirs.”

READ MORE: Liberals, Conservatives offer duelling tax plans in battle over middle-class voters

The messaging around the importance of fiscal balance is also changing among the party leaders.

Lander pointed to Liberal Leader Justin Trudeau, who promised in 2015 to balance the budget by 2019, but broke that promise and has posted deficits each year. And now the Conservative Leader Andrew Scheer, who originally promised a balanced budget in his first term, has now moved the goal posts to five years.

“In Canada there is plenty of room to run a deficit without causing a panic in the bond market or a loss of international confidence,” Lander said.

WATCH: What the leaders are promising on housing

Story continues below advertisement

Mostafa Askari, chief economist at the University of Ottawa’s Institute of Fiscal Studies and Democracy, said comparing Canada’s finances to household debt is an apples-to-oranges comparison.

“There is really no major economic argument for supporting a zero balance,” he said. “It doesn’t mean you can run off deficits forever, but some people are obsessed with it.”

While it’s true that money that goes to servicing the debt could be directed to social programs, 70 per cent Canada’s debt is domestic, according to Askari, meaning the majority of the money borrowed comes from pension plans and Canadian bonds.

“Sometimes when people talk about repaying the debt they talk about it as if it’s evaporating into the air,” he said. “It’s actually going back into the system, back to Canadians.”

WATCH: What the parties are promising parents

Click to play video: 'Money123: What the parties are promising parents' Money123: What the parties are promising parents
Money123: What the parties are promising parents – Sep 28, 2019

Despite what experts say, a balanced budget appears to be important to voters.

Story continues below advertisement

A new Ipsos poll, conducted exclusively for Global News between Oct. 4 and Oct. 7, found that 77 per cent of respondents said it’s important that the next government balance the books and not run a deficit.

Conservative voters (82 per cent) were more likely to agree with this priority, while Liberals (66 per cent) less so. A majority of NDP (73 per cent) and Green voters (71 per cent) also agreed.

When it came to prioritizing a balanced budget over other options, the poll found Canadians weren’t on the same page. Roughly 31 per cent said balancing the budget is the top priority, even if it means spending cuts or tax increases. Thirty-six per cent said that lower taxes was more urgent, even if it means continued deficits or cuts.

READ MORE: Justin Trudeau’s Liberals have 3 budgets under their belts. Are they keeping their promises?

Another 33 per cent said that investing in government programs is the priority, even if it means no tax cuts or continued budget deficits. The poll involved interviews with more than 1,500 Canadians online and is accurate to within 2.9 percentage points, 19 times out of 20.

Meanwhile, credit rating agencies have warned Ottawa that continuing to run deficits could make Canada more vulnerable in a recession.

Story continues below advertisement

Fitch Ratings Inc. warned in March that the country’s debt levels are higher than other top rated countries and that the combined federal and provincial debt is close a level that’s “incompatible” with a triple-A rating.

“Canada’s gross general government debt, combining federal and provincial fiscal accounts, is higher than other ‘AAA’ rated sovereigns, excepting the U.S, and remains close to a level that is incompatible with ‘AAA’ status,” the report said.


Sponsored content