Joe Oliver: Hurrah Canada, a balanced budget is coming … in 27 years
A Globe and Mail headline last month trumpeted the good news: “Deficit on track for elimination by 2045, a decade earlier than last year’s projection.” You would have thought that the government had accomplished something quite remarkable, that our fiscal challenges are well in hand and that doomsayers are conjuring up a problem out of whole cloth.
A more pertinent headline would have read quite differently: “Annual deficits will drag on for another 27 years.” That is remarkable, but hardly in a good way. Moreover, it might remind people that the Liberal election platform promised a “modest” $10-billion deficit and a return to balance in the last year of its four-year mandate. No wonder Finance Minister Morneau sticks to his talking points and refuses to say when the budget will be balanced. Waiting 27 years does not have a terribly imminent ring to it.
What a difference a change of policy can make! For those old enough to remember and nostalgic enough to care, our Conservative government balanced the books in fiscal 2014-15 and I delivered a $1.4-billion surplus budget for 2015-16. In November 2014, based on our prudent fiscal approach, the Department of Finance’s Long-term Update of Economic and Fiscal Projections had the federal debt totally paid off by 2040 and net assets reaching $11 billion by 2045.
Fast forward three years. Just before Christmas, when Canadians were more focused on Santa Claus than fiscal flaws, the department released its 2017 update. Debt is now projected to balloon to over $1 trillion by 2035. Instead of earning interest, our children will be burdened by $56 billion in debt charges for that year alone, rising to over $67 billion by 2045.
Yet people do not seem especially concerned. After all, we are a rich country. Fiscal responsibility is so boring. Billions are hard to relate to. The kids don’t care we are mortgaging their future. So what if Keynes advocated government intervention during a recession, but not during a period of growth? The debt-to-GDP ratio will gradually decline. Just be sure to protect health care, repair the roads, raise entitlements and keep those pesky pipelines away from our hood (but don’t stop importing foreign oil). Otherwise, sock it to me Justin!
Well, there are consequences to higher debt. Interest obligations are a drag on economic growth. They preclude meaningful tax cuts, squeeze social spending and make it more difficult to respond to a geopolitical crisis or a cyclical economic downturn, which happens on average every eight years in North America.
Although we perform relatively well compared to other countries on a variety of measures, we have recently slipped on a few. According to Forbes, we ranked fifth as the best country in which to do business, with the U.S. at 12th. Previously Bloomberg ranked us number two, then one. The World Economic Forum said that we have the third most stable banking system in the world — down from first for eight years running. Even the annual World Happiness Report ranked Canada seventh, down from sixth. Of more concern, Canada has fallen from fifth to 11th in the Fraser Institute’s Economic Freedom of the World Report.
We have a looming competitive issue with our biggest trading partner, in addition to the perilous NAFTA renegotiations. While Canadian corporate taxes are significantly lower than in the U.S., that will change dramatically starting next year when sweeping American tax reform slashes corporate rates from 35 per cent to 21 per cent.
Perhaps the overarching challenge to our economic prosperity is a remorseless demographic headwind that, according to the Finance Department, has passed its tipping point. There are more seniors over 64 than children under 15 and baby boomers are reaching retirement age. The ratio of workers to seniors will fall brutally from four times to 2.5 times in the next 20 years. Also, with more elderly workers, labour force participation is declining. GDP growth is a function of growth in labour supply and labour productivity. Therefore, an aging global population and declining productivity among OECD counties means slower global growth, which also impacts Canada’s prospects.
Average economic growth in Canada has declined from 4.8 per cent (1950-1979) to 2.4 per cent (1980-2016) and is projected to fall to 1.8 per cent (2017-2055). Since there is little we can do about demography, even with increased immigration, the only path to higher growth is improved productivity.
Productivity enhancement is a thorny issue, but there can be little doubt that ballooning debt and high interest payments are negatives. Endless deficits, even when the economy is growing, undercut our ability to meet the challenges Canada must face over the longer term. We need to get our fiscal house in order a lot sooner than 2045.
Joe Oliver, the former minister of finance, is chair of Echelon Wealth Partners.