Liberals’ approach to deficits backs them into an unfortunate fiscal corner

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Federal Finance Minister Bill Morneau is promising financial support for Canadians who are likely to face economic hardships due to the spread of COVID-19. Mercedes Stephenson looks at Morneau's promise, and how this infection could affect the upcoming federal budget – Mar 6, 2020

Many have wondered, as the Liberals’ promised “modest” deficits turned into much-less-modest deficits, if we can’t balance the budget in good times, where does that leave us when things turn bad?

We’re about to find out, it would appear.

With growing global economic uncertainty in the face of the COVID-19 outbreak — coupled with the economic uncertainty within our own borders caused by weeks of rail blockades — the Liberals’ upcoming budget will make responding to these challenges a priority.

READ MORE: Coronavirus cases top 100,000 worldwide, sparking global economy concerns

There are measures that don’t involve additional spending that could encourage economic growth and promote investment in Canada, but the indications at this point suggest that spending initiatives are the government’s preferred approach. That will prove tricky, however, especially if an economic slowdown means a hit to federal revenues.

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Following a speech to a Toronto business audience Friday, Finance Minister Bill Morneau insisted that the government will “maintain our fiscal firepower to deal with potential challenges down the road while ensuring that we are also dealing with the issues immediately.”

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On top of that, though, Morneau has maintained that lowering the federal debt-to-GDP ratio is still a priority. The government also has a number of costly election promises they’ll be expected to follow through on.

The Liberals have backed themselves into a corner where it’s going to be nearly impossible to balance all of these priorities. And it didn’t have to be that way.

In 2015, the Liberals promised a couple of years of modest deficits (in the neighborhood of $10 billion) before returning to balance well before the 2019 election. Instead, those deficits turned out to be much larger than promised, and we were nowhere near a balanced budget last year. The December fiscal update showed that the forecast $19.8-billion deficit had grown to $26.6 billion. The following year’s deficit is expected to be even higher.

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READ MORE: Federal budget 2016 — Liberal government projects $29.4B deficit

This was all through a period when the national economy fared fairly well. There was no drop-off in revenue or any sort of dire circumstances that forced the government’s hand. Essentially, these were deficits of choice. But once we start to accept the notion that we can handle deficits when times are good, when would we ever not run deficits?

Moreover, though, how much has the Liberal government tied its own hands when it comes to responding to these new economic challenges?

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No one could seriously argue that had the Liberals stuck to their original “modest” deficit promises or been more restrained in spending growth that somehow we’d be in a more precarious economic situation. However, one can very credibly argue that in such a scenario we’d have much more room to maneuver in crafting a response to what is now legitimate economic adversity.

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That leaves the government facing a dilemma: do we allow the federal deficit to balloon well past the level it is already at or does it mean a more tepid response to the economic challenges we are facing? Any pretense of getting back to balance in the next few years was already out the window, and we’re likely to be adding several more years of new debt — and servicing that debt comes with its own costs.

READ MORE: Fact check — How does Canada’s economic growth stack up with the rest of the G7?

Given that the Liberals haven’t paid any sort of political price for their broken deficit promises, it’s little surprise that they’ve doubled down. And given the ballooning deficits under President Donald Trump, perhaps it’s not just voters in Canada who have decided that deficits and debt are not major priorities.

But it was inevitable that the Canadian economy would hit a bumpy patch, and the Liberals’ approach made it inevitable that we’d face some unpleasant budget challenges. The government isn’t totally to blame for these economic headwinds, but they bear a great deal of responsibility for our lack of capacity to face them.

Rob Breakenridge is host of “Afternoons with Rob Breakenridge” on Global News Radio 770 Calgary and a commentator for Global News.

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