As a former deputy minister of Finance – he was Paul Martin’s right-hand man in the deficit-busting 1990s – David Dodge would know a thing or three about misrepresenting the country’s finances. In those days the game was “hide the surplus”: Federal budgets serially understated the strength of the government’s fiscal position to fend off demands for more spending.
Well, now, here we are more than 20 years later, and Finance is playing a very different game, as Mr. Dodge describes in a new report co-authored with Robert Asselin – budget director under another former Liberal finance minister, Bill Morneau – and Richard Dion, a senior adviser at Bennett Jones.
Don’t let the anodyne title (Assessing the Potential Risks to the Sustainability of the Government of Canada’s Current Fiscal Plan) and diplomatic language fool you. The gist of the report is this: The government’s numbers are a fiction and a fraud. Only now the game is “hide the deficit.”
Recall the comforting figures laid down in last November’s fall economic statement: a deficit declining majestically from $90-billion last year (itself down from the record $328-billion set the previous year, at the height of the COVID-19 pandemic) to $36-billion this year – and a surplus in five years. The debt-to-GDP ratio, likewise, was projected to decline from 46 per cent last year to the high 30s five years out.
All of this, however, assumes growth in program spending of just 2 per cent per annum – this, with inflation running at least 2 per cent, and population growth in excess of 1 per cent. That’s right: The government that increased spending by more than 13 per cent, after inflation and population growth, over its first four years – before the pandemic, that is – now promises to cut it by 6 per cent, real per capita, over the next four.
Bunk, say Messrs. Dodge, Asselin and Dion. Well, not in so many words. Rather, the report models the effects of three potential risk factors on the government’s projections. Suppose there is a recession in 2023, first. Now add the lingering effects of supply constraints, as the world continues to adjust to the pandemic, the war in Ukraine and their combined aftermaths.
Third, and most important, suppose spending comes in higher than projected – a not unreasonable supposition, given the many commitments that have yet to be reflected on the government’s books, from the promised increase in transfers to the provinces to the $300-billion (over 30 years) to acquire and service 15 warships under the National Shipbuilding Strategy and beyond.
Suppose, then, that spending merely increases in line with inflation and population growth, rather than lagging behind. Combined with the other two risk factors, the result is a much more unsettling picture of Canada’s finances: a debt-to-GDP ratio that climbs to over 50 per cent and stays there, while the cost of interest on the debt, now at just under 8 per cent of revenues, jumps to 14 per cent.
Of course, we don’t all turn into pumpkins the minute the debt-to-GDP ratio exceeds 50 per cent. But it leaves us that much closer to the brink of what the authors blandly call “unsustainability.”
And while we might yet avoid a recession or continued supply constraints, the third risk factor seems almost certain to come into play: excess spending. I say this because it has invariably proved to be the case in the past under this government. Whatever the Trudeau Liberals forecast for spending, it is sure to be an understatement, and by a substantial margin.
I have written about this trick before. In every budget or economic statement, the government issues a forecast showing spending rising tamely along the same gently sloping curve. Only with every budget or economic statement the whole curve shifts upward by several billion dollars, as the government revises its forecasts.
So where future spending is always predicted to rise by 2 per cent a year or less, actual spending has risen by 5 per cent to 6 per cent a year: a figure that was nowhere predicted or approved in advance, and is barely noticed even after the fact.
Since the Trudeau government took power, actual spending has come in over what was forecast just the year before by an average of 5 per cent; extend the forecast period to three years, and the excess climbs to 15 per cent. There is simply no basis to believe any of the government’s spending projections, and it was good of Mr. Dodge, in particular, to remind us of it.
Andrew Coyne