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Understanding Flaherty's deficit promise

What getting back to balance a year ahead of schedule will mean.

(Photo: Getty Images)

The government’s pledge to eliminate the deficit by 2014-2015—a year earlier than initially planned—is one of the few changes outlined in the budget unveiled on June 6. But will getting back to balance one year sooner make much of a difference? Chris Ragan, McGill University economist and the C.D. Howe Institute’s David Dodge Chair in Monetary Policy, explains what’s behind the new target—and what lies ahead.

Canadian Business: Why is the government’s timeline for eliminating the deficit something Canadians should care about?
Chris Ragan: Most Canadians think about budget deficits in the same way they think about their own: they like the idea that governments are not spending beyond their means and not going forever and indefinitely into debt.

Since 1995, the federal governments and the provincial governments have embarked on a pretty serious deficit-reduction path that took us from very large deficits in the mid-1990s to surpluses 10 or 12 years later, and the total outstanding debt of a share of the economy declined dramatically. So when the recession comes along, and the government introduced its fiscal stimulus package that involved a couple of years of very large deficits, I think most Canadians’ view was, “OK, we did that during the recession as a necessary part of a stimulus package…but let’s not make this a permanent thing. Let’s get back to balance.”

Remember, for every year that you are running a budget deficit, you are increasing the total stock of government debt. If you balance the budget by 2014-2015, and you balance the budget for the next 10 years, then the debt to GDP ratio will fall quite dramatically.

CB: What do you think motivated the revision?
CR: In the eyes of their strongest supporters, a lot of what they did in 2009-2010 was just off the edge. It was just way too interventionist. In the eyes of a lot of people who are not their strongest supporters, they would look at them and say, “You guys claim to be fiscal conservatives, but even before the recession you were spending like drunken sailors.” So I think they want to get back to their principles, and their principles are to make government smaller.

I think the problem is they may not be giving enough detail about how they’re going to get back there. It’s one thing to include a bunch of numbers in the budget and say, “Spending is only going to be growing at 2.5% for the next five years.” It’s easy to write those numbers down, but it’s really hard to make them do it. So unless you’re going to give us the details about how you’re going to cap spending growth, there’s no particular reason why we should believe you.

CB: How significant is the revision?
CR: One per cent of GDP is about $16 billion, so whether they get back to within $3 billion or $5 billion of balance or not in 2014 or 2015 or 2016, we’re really down to short strokes there. From an optical point of view, I think it matters. It’s nice to say, “Yep, we’re back to balance.” But in terms of the debt-to-GDP ratio, the difference would be almost unnoticeable. If you didn’t get back until 2015-2016, you’re going to be very close by 2014-2015.

Our fiscal situation, you compare it to Greece or even the U.K. or the U.S., we’re just in a completely different ballpark. We are talking about whether we get back to balance in 2014-2015 or 2015-2016, and if we miss it, we miss it by half a percentage point of GDP. These guys have deficits of 8%, 9%, 10% of GDP, with no prospect of getting back to balance in five years. We’re so lucky to be having this kind of nuanced, down-to-short-strokes debate. But the reason we’re lucky is because we were really vigilant about it from the mid-1990s on. 

CB: By some estimates, to follow through on their promise the Tories will have to slash annual spending by about $4 billion. Can you put that into perspective?
CR: The government’s total outlays are something like $280 billion. Four billion dollars is 1.5%, and you really ought to be able to find 1.5% to cut in your budget. So can they cut $4 billion? Sure. But where is it going to [come from]? And if they’re going to say, “It’s not going to come from transfers to provinces, and transfers to individuals,” they’ve basically taken $100 billion off the table. So now, what was a 1.5% cut becomes a 3% cut from a smaller pool. It’s not just trivial.

I worry a little bit that the government believes it can just make everything a little bit more efficient and it’ll save that amount of money. Is there fat in Ottawa? For sure. But $4 billion a year is a whack of fat, and I’m not convinced that they can easily come up with $4 billion in efficiencies.

Somewhere along the way, they’re going to actually have to go after programs, and I think it is the responsibility of government to review programs and look for low priorities. It’s not a hack and slash exercise. We want government to do less because we want the government to take less money out of your pockets in the form of taxes. So let’s identify things that we can all broadly agree are not things that government should be doing.

I think the government should actually launch a blue-ribbon panel on program review—a nice, independent, smart-person panel on program review—so they can actually find those billions they’re hoping to find without just relying on efficiencies. And I would be very happy to chair it.

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