Deficits now seem inevitable. How do the parties plan to manage them?

Ask not whether PM-hopefuls plan to balance the budget, but how they will deal with revenue shortfalls

 

“Will you or won’t you run a deficit?” is the latest question coming from Ottawa, but given the continued economic weakness that question is now out-of-date. Instead, we need to be asking “How will your government deal with deficits that are almost certain to occur?”

Budget 2015 left very little room for error, with projected surpluses of less than $3 billion per year in each of the next four years, along with reduced contingency reserves in each of those years. When the budget was released I wrote that the projected surpluses were based on overly optimistic oil price forecasts and that the “tough decisions may be necessary in the future if the budget is to stay balanced.” With commodity prices continuing to tumble and a shaky Chinese economy, it seems that I underestimated the magnitude of the weakness of the Canadian economy. It now appears that even with tough decisions, the federal government may not be able to avoid deficit.

The slow Canadian economy in 2015 is set to wipe out not just the projected surplus for this year, but for future years as well—as the sensitivity section contained in the budget shows. There is no guarantee that the economic growth in 2016 or 2017 will be much better than it is now. Two or three consecutive years of slow or negative economic growth would compound the problem and create a deficit in the tens of billions of dollars, according to the sensitivities in Budget 2015.

To see this for yourself, I created a surplus/deficit estimator using the sensitivity analysis from the budget. Simply enter in your estimates for real GDP growth, GDP inflation, the 10-year bond rate and your desired contingency reserve in the yellow cells, and the sheet will estimate the projected surplus or deficit for fiscal years 2015-16 through 2019-20.

Of course, we could avoid deficit if the party in power (whichever one it will be) raised taxes or slashed spending. But each of our major parties are promising to move in the opposite direction, promising a combination of tax cuts and new spending. We should demand our party leaders to tell us how far they are willing to go in order to balance the budget, what combination of tax increases and spending cuts they would be willing to make to get us there, and that they consider whether it is even economically sensible to try to balance the books in a time of economic weakness.

Mike Moffatt is an assistant professor in the Business, Economics and Public Policy group at the Ivey Business School. He has worked with Canadian politicians and policymakers of all political stripes to craft more effective public policy, including his most recent role as an outside economic adviser to Liberal Leader Justin Trudeau. Follow @MikePMoffatt on Twitter.

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