Who’s Afraid of Deficits?
We all knew that Budget 2015 was optimistic about medium term growth and rebounding oil prices, but the good people at the PBO have given us an indication of just how far off those projections were. They estimate that nominal GDP will be about $20B lower through 2020 ($30B lower in 2016), which also means bigger government deficits through 2020.
While pundits had been OK with small, temporary deficits, at this news some headlines shouted that the Liberal’s plan to balance the budget was in jeopardy, and others contemplated the possibility that the new government would be less bold in the face of economic weakness.
Of course that is exactly the wrong response, and gladly McCallum pointed out the obvious, that this news “is something that underlines the need for the job-creating infrastructure investments”.
There has emerged a mainstream consensus that deficits / surpluses don’t matter so much, that a better yardstick of fiscal sustainability is our debt-to-GDP ratio. So what does yesterday’s news mean for this indicator?
Assuming the Liberal government fully implements the investment promises in its platform and the PBO projections are correct, the debt-to-gdp ratio is still projected to fall by 3 percentage points between now and 2019/20. In fact, the ‘modest’ deficits proposed in the Liberal platform only add 1 percentage point to the debt-to-GDP ratio over this timeframe, which translates into an increase of about $42B in debt between 2015/16 and 2019/20. (And, all of this assumes that there is no short term stimulative effect from the proposed spending either.)
Let us look at the increase in spending/borrowing over the 2015-16 to 2019-20 timeframe that would result from targeting various debt-to-gdp ratios.
Assuming the PBO projections for GDP growth are correct, the federal government could borrow more than twice as much over the next four years – $86B – and the debt-to-GDP ratio would still be lower than when they took office.
Given that the economic news has worsened, a case should be made for increasing spending. Even though we aren’t in a recession any more, we are facing a period of what Armine calls “slowth”. Demographic shifts, among other things, are limiting our economic potential. Investments should target medium to long term growth, and meet basic needs that have fallen through neo-liberal cracks – such as clean water for First Nations communities.
There is more than enough room for increased investment, even given mainstream economic constraints.