Ottawa’s ‘fiscal guardrails’ on debt levels have suddenly gone AWOL

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The Liberals’ fiscal guardrails have vanished, or at least disappeared from public view.

In November, 2020, Finance Minister Chrystia Freeland sidled past demands for a fiscal anchor, such as setting a target level for Canada’s debt burden, to limit the growth in the federal government’s spending and debt. Instead, she announced, the government would adopt “fiscal guardrails,” broader economic measures that would guide decisions on $100-billion of stimulus spending over three years.

Those guardrails included the employment rate, the unemployment rate and total hours worked, although the Liberals remained studiously vague on their specific targets.

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But their function was clear. “Fiscal guardrails will help us establish when the stimulus will be wound down,” Ms. Freeland said as she delivered her fall economic statement. “These data-driven triggers will tell us when the job of building back from the COVID-19 recession is accomplished, and we can bring one-off stimulus spending to an end.”

To be sure, this year’s fiscal update has ample detail about the recovery of labour markets. In a background briefing to reporters, a senior Finance official said the fiscal guardrails are still being closely monitored internally.

But the words “fiscal guardrail” did not appear in the update. And the promise of fiscal prudence that those rails were guarding has also gone AWOL.

That’s not because the government doesn’t have a good story to tell on economic recovery. To the contrary – as Finance officials helpfully detailed – most of the metrics that made up the guardrails are at, or very close to, prepandemic levels.

Total hours worked are back to what they were before the pandemic devastated labour markets.

The employment rate is close, at 61.4 per cent, to the 61.8-per-cent rate of February, 2020. Adjusted for changes in the average age of Canada’s population, the employment rate has even closed that gap.

Unemployment is near the finish line as well, with the 6-per-cent rate of November, 2021, not far off the prepandemic rate of 5.7 per cent. Ms. Freeland also noted in her speech that national gross domestic product (GDP) will hit $2.48-trillion this year – “almost exactly” what the 2018 budget forecast, she said.

That amounts to both a stellar economic comeback, and a difficult political bind for the Liberals. The fiscal guardrails were, after all, the supposed “data-driven triggers” to withdraw stimulus.

Yes, some pandemic programs have been wound down (although others were extended). And Ms. Freeland pointed out that the Liberals moved to targeted support measures this fall.

But there are a couple of problems in positioning that as reducing stimulus. First and foremost – the biggest pandemic support programs were launched months before talk of stimulus spending. And even under the most generous accounting, their cost accounts for only a slice of the $100-billion package. Lastly, even with the end of some programs, most of the planned spending proceeded as planned.

For the most part, the labour-market targets have been hit, or are close to it. Isn’t it time to pull those data-driven triggers?

Indeed, in her speech on Tuesday, Ms. Freeland said, “... We are so pleased to report that Canada has largely recovered from the economic damage inflicted by COVID-19 and is now poised for robust growth in the months to come.”

But rather than withdraw stimulus spending, as promised, the Liberals have instead withdrawn the fiscal-guardrail promise. What’s left is a commitment to what they call a fiscal anchor: reducing the net-debt-to-GDP ratio over the medium term – but without any number attached that could hold the government to account.

The continuation of stimulus spending on a rapidly reheating economy partly reflects the reality that the $100-billion temporary stimulus program is anything but temporary. Less than half of the package announced in the April budget is set to expire at the end of fiscal 2023-24. The majority continues for years, and much of it is permanent – most notably, the Liberals’ centrepiece policy of spending $29.8-billion over five years to expand affordable child care.

Far from reducing spending, the Liberals have been piling on more as the fiscal update projects revenue to come in higher than expected: $67.4-billion more through to fiscal 2025-26, including $9.6-billion backdated to fiscal 2020-21. Reduced expenses offset that amount, but none of those falling costs amount to a deliberate decision to withdraw stimulus spending.

Still, the government does plan to bank at least some of its windfall, with the fiscal update projecting deficits will fall this fiscal year and over the next four by a cumulative $59.8-billion.

As a result, it expects the ratio of net debt to gross domestic product to decline slightly faster than at the languid pace foreseen in the spring budget. By 2025-26, the debt-to-GDP ratio will hit 45.3 per cent, down from 47.5 per cent in 2020-21, according to the fiscal update.

That represents an improvement over the 49.2-per-cent projection for fiscal 2025-26 in the spring budget, with Ms. Freeland pointing to that number as a measure of the government’s commitment to fiscal prudence, in the form of that fiscal anchor. But it is still a long way from the debt-to-GDP ratio of 31.2 per cent at the end of fiscal 2019-20, as the pandemic began to hit Canada.

“We remain committed to the fiscal anchors that we outlined in this spring’s budget – to reduce the federal debt-to-GDP ratio over the medium term and to unwind COVID-19-related deficits,” she said in her speech, echoing comments made shortly before that to reporters.

Of course, those projections of a continued slow decline in the pandemic debt overhang do not include the billions of dollars in promises the Liberals made during the election campaign, or however many billions of dollars in additional health care funding results from negotiations with the provinces.

And, most notably, there is no timeline – no commitment at all – to return the country’s finances to their prepandemic solid footing.

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