Once upon a time, politicians of all stripes fell over each other trying to demonstrate their fiscal responsibility. No credible leader could step to the podium without making a solemn promise to balance the budget.
That tough-love approach was cemented in the 1990s, after then-finance minister Paul Martin balanced the federal budget for the first time in decades – through deep and painful cuts in social programs (like health care and employment insurance). His government was rewarded in the next election, upending conventional wisdom that spending cuts are politically suicidal. Subsequent governments, federally and provincially, followed suit.
Two decades later, however, this stern approach seems to have lost its vigour. Canada entered this election with the biggest deficit in history: $354 billion for the last fiscal year. Yet for the most part, that deficit has not been a major flashpoint in the campaign. And with one exception, all parties are promising expensive new programs – not slashing the ones we have.
In short, all but one of the parties accept that Canada will run large deficits for years to come. And Canadians, for the most part, aren’t losing sleep over it. (One poll found just nine per cent identified government finances as their top issue.) Nor should they.
This change in attitude reflects a transformation in economics, not just politics. Canada, like all industrial economies, fell deeply into deficit after the 2008-09 global financial crisis. That meltdown caused a worldwide recession, and governments spent trillions bailing out banks and paying income supports.
Some countries – primarily in Europe – then tried to restore balanced budgets as soon as possible. They cut spending deeply, on the assumption the economy would right itself once the immediate financial chaos had subsided. But that assumption was dead wrong, and deep spending cuts made matters worse. As a result, Europe entered a decade-long funk – termed the Great Recession – marked by slow growth, unemployment, political turmoil and (perversely) continuing deficits.
That caused economists around the world to rethink their approach to fiscal policy. The chilling effect of spending cuts on economic recovery means fiscal contraction can actually deepen deficits, since government revenues are undermined by continuing stagnation.
Moreover, it turns out that governments can run deficits for years without big drama. Interest rates plunged after the financial crisis, and stayed there, hovering around two per cent (close to zero after inflation). So long as GDP grows faster than super-low interest rates (nominal GDP typically grows four to five per cent per year in Canada), accumulated debt will shrink automatically relative to the economy, even with continuing deficits.
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Fast forward to the pandemic. This time, economists and bankers were near-unanimous that deficit spending should be pumped up quickly – and kept there. So it’s not a sign of “fiscal mismanagement” that Canada’s deficit surged; it was prudent, recommended and essential to economic recovery.
Most economists also agree that deficit-financed government spending will be essential for years to come, given weakness in other activity (like investment and exports). With interest rates at rock bottom, and staying there, that’s eminently feasible. Even post-COVID-19, federal interest payments are stable at just over one per cent of total GDP – a quarter as much as in the 1990s.
This new economic consensus was reinforced by the experience of Canadians during the pandemic. After all, nine million Canadians received government income assistance last year (like the CERB, EI and other programs). They understand that without that support (and the deficits that made it possible), the pandemic would have been far, far worse. In that context, pledging to attack the deficit forcefully is a sure vote-loser.
No wonder the current crop of politicians has been fairly sanguine about the deficit. Every day they announce more new programs, tax cuts and other costly promises. They know that means deficits will continue.
The clear exception is Maxime Bernier, who pledges to eliminate the deficit in four years through massive cuts to income programs, and full cancellation of federal funding for anything in provincial jurisdiction (like health care). At least Bernier is honest about what a balanced budget requires. That can’t be said for Erin O’Toole’s Conservatives. Clearly uncomfortable with explicitly advocating deficits (even as his own list of expensive promises gets longer), O’Toole makes a token nod to balancing the budget: within 10 years, and “without cuts.” That’s not arithmetically possible. And if he was serious about balancing the budget, Canada would experience a decade of fiscally induced stagnation akin to Europe’s Great Recession.
Voters will have to decide which of O’Toole’s contradictory personalities they believe: the one promising big new programs and no cuts, or the one berating Liberal “fiscal mismanagement” and promising to balance the budget. Meanwhile, the other leaders hope voters have indeed learned to stop worrying and love the deficit. In reality, deficits have helped more than they hurt – and we’re going to need them for some time to come.
Jim Stanford is economist and director of the Centre for Future Work, based in Vancouver.
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