The Conservatives say they won’t duplicate the Liberals’ habit of spending unexpected increases in revenue.BLAIR GABLE/Reuters
The Conservatives are promising to balance the federal budget within 10 years without spending cuts or tax increases, even as they add tens of billions of dollars in new spending on top of the 2021 budget.
The arithmetic works, barely, but the politics could be problematic. And the ability of the party to make good on its balanced-budget promise very much hinges on what is defined as a “cut.”
Complicating the Tories’ balanced-budget promise is a parallel commitment to increase the Canada Health Transfer, or CHT, to the provinces by at least 6 per cent each year – far higher than in any likely scenario for growth in Ottawa’s revenue – putting additional pressure on the rest of the federal budget.
For now, the Conservatives aren’t spelling out how they propose to balance the budget in the coming decade. The costed platform that the party released on Wednesday lays out detailed projections only through to fiscal 2026, when the Conservatives say the federal deficit will have declined to $24.7-billion. (The party says its detailed projections don’t extend further because the fiscal baseline scenario from the Parliamentary Budget Officer does not go beyond fiscal 2026.)
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The Tories say they would eliminate the deficit by fiscal 2029, but don’t say how, beyond the promise to avoid cuts and saying in their platform-costing document that they “will run a disciplined government that limits the growth of future spending.”
However, as the chart below shows, that fiscal discipline will be late on the scene. Five years of a Conservative government would see deficits that rival those resulting from the Liberal fiscal plan.
However, the Conservative plan does propose to keep a tighter lid on spending, with $53.8-billion in new spending and incremental debt charges through to fiscal 2026, significantly lower than the $80.7-billion the Liberals would spend over those five years on program expenses and the resulting added debt charges. (The Liberals are also proposing tax hikes that pay for some of those additional outlays.)
The Conservatives also say they won’t duplicate the Liberals’ habit of spending unexpected increases in revenue. As the chart below shows, in the two full fiscal years before the pandemic, the Trudeau government did boost spending as revenue rose beyond its earlier projections. If the Liberals had stuck to the fiscal plan laid out in their 2016 budget – already predicated on higher expenditures – program spending would have been more than $14-billion lower in fiscal 2019.
One thing the Conservatives are definitely not counting as spending cuts are the immediate actions they would take to reverse Liberal spending priorities in future years, most notably billions of dollars for child care.
Despite several queries, the Conservatives have not specified what the party considers to be a spending cut. That may seem a question of semantics, but it can amount to differences running into the billions of dollars over time.
One common definition of a spending cut is anything that reduces the inflation-adjusted per-capita budget of a program. That means that the dollars spent on any government program have to rise each year (by just under 3 per cent given current inflation and population trends) to keep the per-capita value flat. Anything less than that increase means the value shrinks – in other words, it’s a spending cut.
A less precise measure of a spending cut is to simply consider the raw dollars spent. If $1-billion was spent last year, and $1-billion is spent this year, then there is no spending cut (even if inflation has eroded the value of that expenditure, and even if it has to spread among a larger number of people). Several provincial governments have, for instance, touted their increased education spending, even though the rate of spending increase was lower than what was needed to keep pace with population growth and inflation.
Several fiscal experts interviewed by The Globe and Mail say that economic growth will provide enough fiscal manoeuvering room in the coming decade to balance the federal budget. But that assessment comes with significant caveats.
University of Calgary economist Trevor Tombe calculated that annual real growth in gross domestic product of 1.8 per cent through to fiscal 2031 would increase the federal government’s revenue to $565-billion in that year from the $452.1-billion that the PBO forecasts for fiscal 2026.
The PBO is also forecasting federal program spending at $404-billion in fiscal 2023; if that spending grew in line with inflation and population growth, at 2.9 per cent a year, it would rise to $522-billion by 2031. Add $42-billion in debt servicing costs, and expenses come in just a hair under the $565-billion in projected revenue.
Barring a significant economic contraction, the federal budget could indeed reach balance by 2031.
However, that would require a Conservative federal government to freeze real spending for half a decade. Any new program would have to be offset by a corresponding cut. Economist Don Drummond, a former senior federal Finance official, scoffs at the notion that any government would freeze the budget in place for such a protracted period. “They get elected to do things, and doing something costs money,” he says.
Eighty years ago, Ottawa did pare down its debt burden in part by keeping per-capita inflation-adjusted spending flat for the better part of two decades, as the chart below shows.
But Mr. Drummond notes that the Canadian population was expanding rapidly, giving Ottawa the ability to boost its total spending while still keeping per-person expenditures in check. There is no 21st-century equivalent of the 1950s baby boom to deliver such flexibility today. And the fiscal demands of coping with climate change will surely exert additional spending pressures, he notes.
Beyond the political difficulties inherent in a spending freeze, a key part of the Conservative platform would further complicate any effort to balance the budget: the plan to boost the annual increase in the CHT by 6 per cent.
That promised boost to the CHT doesn’t have much of an impact in the detailed projections from the Conservatives through to fiscal 2026, with an incremental cost of just $3.6-billion. The current formula for calculating CHT increases is based on a rolling average of the nominal growth rate in gross domestic product; the expected postpandemic rebound will temporarily bump up CHT increases beyond the current 3-per-cent minimum.
But later in the decade, the Conservative formula would significantly increase the growth of the CHT, with the party estimating it would transfer a total of $60-billion in additional funds to the provinces.
That $60-billion increase will put pressure on the remainder of the federal budget, if the Tories maintain their balanced-budget pledge.
Kevin Page, president and chief executive officer of the Institute of Fiscal Studies and Democracy at the University of Ottawa, and a former parliamentary budget officer, said the Conservative pledge on the CHT would push federal finances into a danger zone of unsustainability if maintained in the long term. Federal debt would continuously rise unless there were “significant reductions to other spending measures or increases in revenue,” according to the institute’s assessment of the Conservative platform.
Even in the short term, those cost pressures will bite, if the Tories want to keep their balanced-budget promise. Prof. Tombe says that if the 6-per-cent minimum increase to the CHT were enacted, and other transfers to governments increased according to existing agreements and formulas, then the rest of the federal budget could increase no more than 2.3 per cent a year. Mr. Drummond is slightly more pessimistic, saying that program spending other than the CHT could increase by around 1.7 per cent a year.
That would fall well below the 2.9-per-cent increase needed to keep up with inflation and population growth – effectively, then, a spending cut in those other areas.
Tax and Spend examines the intricacies and oddities of taxation and government spending.
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