Why the Conservatives are going after the Liberals' pre-pandemic spending now
The Liberals' deficit spending before the crisis hit could make them more politically vulnerable
The federal balance sheet is a mathematical exercise that has real fiscal and economic implications. But outside of a debt crisis, the greatest value of a surplus or deficit estimate may be as a political idea.
In that respect, the most interesting thing about the $343 billion deficit that Finance Minister Bill Morneau projected on Wednesday is how it might frame the federal debate for years to come.
There is very little actual debate to be had about the current deficit. Almost no one is arguing that the federal government should not have spent nearly $200 billion over the last few months to help Canadians get through a pandemic-induced economic shutdown. The need to continue providing some amount of support through the fall and into next spring seems obvious.
Where there are specific complaints, they tend to be that the government could have spent more and moved faster. As if in response to those critiques, Morneau's 168-page snapshot goes on at length about what the Liberal government has done and makes a point of showing how the federal response in Canada stacks up against relief efforts in other G7 countries.
All of which might explain why the Conservatives stopped short Wednesday of a full assault on the current deficit. Instead, the Conservatives renewed their attacks on the deficits the Trudeau government ran before the crisis. In 2015, the Liberals made an explicit decision to run a deficit and the federal government ran a cumulative shortfall of $54.7 billion between 2015 and 2019.
Watch: Andrew Scheer presses federal government for a pandemic recovery plan
The Conservatives like to argue that the budget was balanced when the Harper government left office five years ago. That's not entirely accurate. In November 2015 — after that year's federal election, but before the Liberals had started to implement their agenda — the office of the Parliamentary Budget Officer released an updated fiscal projection that showed a surplus of $1.2 billion for 2015-2016.
But the federal balance sheet was benefiting from a one-time boost provided by the sale of the federal government's shares in General Motors. In the years following, the PBO projected that the budget would show a deficit of between $3 billion and $5 billion in subsequent years.
For the fiscal year of 2018-2019, the PBO estimated that the federal government's debt-to-GDP ratio — a measure of accumulated debt in comparison to the national economy — would be 27.9 per cent.
The pandemic changed the politics of deficits
In fact, after the Liberal government implemented its spending plans, the debt-to-GDP ratio was 30.9 per cent in 2018-2019. That three per cent difference isn't nothing, but it is the box within which any argument about pre-2020 fiscal policy has to be fought.
Of course, a full evaluation of the Liberal approach before the pandemic hit would have to assess the value of that increased spending. But the 2015 to 2019 era is just the prelude to what's likely to be a larger debate about the shape, size and activity of the federal government going forward.
The federal government is running a deficit of $343 billion but the sky has not fallen — and that is an implicit challenge to the Conservatives' arguments about the primary value of frugality. They also may not want the idea of such widespread federal support for individuals and businesses to be broadly accepted by Canadians.
So, on Wednesday, Conservative Leader Andrew Scheer told the House of Commons that Morneau had presented a "dire" picture of federal finances. Pierre Poilievre, the shadow finance minister, stood and loudly decried the fact that total federal debt is now expected to reach $1 trillion. Poilievre then called on Morneau to reform the government's relief policies so that the free market could be unleashed to create the jobs and growth that are now needed.
The future direction of the Conservative Party still depends on who its next leader turns out to be, but Scheer and Poilievre probably have laid out the broad strokes of what Conservatives will argue in the months and years ahead — that government borrowing is a significant source of concern, that there has been too much spending under the Liberals, and that the private sector must be left alone to create prosperity.
When Conservatives need to argue that Canada cannot "afford" something in the future, they'll no doubt insist that the Liberals have 'spent the cupboards bare'. (Granted, Poilievre and Scheer were making that argument before the current crisis. Maybe they need a new metaphor.)
Watch: The National: Bill Morneau on $343B deficit, post-pandemic recovery
Where the Liberals are vulnerable
One trillion is not a magic number; the federal debt almost inevitably would have reached that level at some point in the future. But it is a big number. And big numbers can be attention-grabbing.
No one should take the deficit for granted, but Morneau was prepared to argue that Canada's current fiscal plight looks less alarming when it's placed in context. Canada went into this crisis with the lowest debt-to-GDP ratio in the G7 and it still has the lowest level of net government debt among those countries. Due to low interest rates, the federal government also will pay a lower servicing charge on that debt this year than it did last year, even with the extra borrowing.
Federal debt-to-GDP is now expected to reach 49 per cent — well below its peak of 66 per cent in the mid-1990s. As the economy continues to recover, that ratio should decline.
But even if no one is really contesting the need to spend now, there will be a debate later about how to manage the deficit and the debt going forward. And the extent of the federal government's emergency spending — coupled with the deficits of earlier years — could leave Morneau and the Liberals vulnerable to claims that they are irresponsible or profligate.
There was some faint grumbling already when it seemed that the federal government might not be doing enough to ensure that payments from the Canada emergency response benefit (CERB) weren't going to ineligible recipients. Any future spending scandals could be much more potent in light of the big numbers that were released on Wednesday.
And Morneau will soon have to confront all the other problems this pandemic has exposed, and all the outstanding requests that have piled up over the last four months. Major issues involving long-term care, precarious work, inequality, child care and climate change are going to be waiting for the finance minister once it's time to rebuild — not to mention the need to be better prepared for the next pandemic. Each of those issues will come with demands for new funding.
On that note, the NDP's Jagmeet Singh is already calling for a new tax on the richest Canadians. Of course, the NDP was proposing a wealth tax before this pandemic — but New Democrats will have even more reasons to argue for one now.
For the Liberals, doing everything — and making the case that they can do so responsibly — is only going to get harder. And Liberals who worry about this government's legacy must know that if they leave the government on an unacceptable fiscal path, they'll give their successors a handy reason to significantly restructure whatever is left behind.
Watch: The At Issue panel discusses what's missing from the fiscal snapshot
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