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Debt and deficits: Where the parties stand on balancing the books in Canada

Debt and deficits: Where the parties stand on balancing the books in Canada
Canada
Canadian politicians love comparing balanced budgets to a household balancing its chequebook, but economists say the comparison is misleading and that smaller deficits are now like the new balanced budget .

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The main parties are also no longer as rigid about maintaining balance. In fact, regardless of whom you vote for on Oct. 21, no party has a plan to balance the budget in its first term in office.

Kevin Milligan, a professor of economics at the University of British Columbia, says focusing on maintaining a sustainable debt-to-GDP ratio is more important than returning to zero balance.

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Countries, obviously, have much longer lifespans. And as long as the rate of economic growth exceeds the budgeted deficit, running smaller deficits is not a huge concern, Milligan said.

He noted that Canada would need to add $800 billion of debt to get back to the crisis of the 1990s.

“You don’t want to take on too much debt because it could have a negative reinforcing spiral of interest payments leading to a problem,” he said. “But we are nowhere close to that.”

The current national debt sits around $685.5 billion as of March 31, 2019, according to Finance Canada, with the federal debt-to-GDP (gross domestic product) ratio hovering around 30.9 per cent, down from 31.3 per cent the previous year.

REALITY CHECK:

Canada currently has the lowest debt burden among G7 countries and the public debt charges amounted to 6.7 per cent of expenses in 2018–19, down from a peak of nearly 30 per cent in the mid-1990s.

This means for every dollar of debt, Canada is spending roughly seven cents servicing it. In the 1990s, Canada was paying closer to 30 cents.

And when it comes to deficits, Ottawa posted a $14-billion deficit in 2018-2019 , which relative to a roughly $2.3-trillion economy, could lead to further reductions in the federal debt-to-GDP ratio.

Moshe Lander, an economics professor at Montreal’s Concordia University, said talk of balancing the books is often “good politics but not necessary economics.”

“It’s not something that any politician would feel comfortable saying in front of an open mic,” Lander said. “They’ll sell it to the public on the grounds that you or I have to balance their budget and the government has to balance theirs.”

The messaging around the importance of fiscal balance is also changing among the party leaders.

Lander pointed to Liberal Leader Justin Trudeau, who promised in 2015 to balance the budget by 2019, but broke that promise and has posted deficits each year. And now the Conservative Leader Andrew Scheer, who originally promised a balanced budget in his first term, has now moved the goal posts to five years.

“In Canada there is plenty of room to run a deficit without causing a panic in the bond market or a loss of international confidence,” Lander said.

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Mostafa Askari, chief economist at the University of Ottawa’s Institute of Fiscal Studies and Democracy, said comparing Canada’s finances to household debt is an apples-to-oranges comparison.

“There is really no major economic argument for supporting a zero balance,” he said. “It doesn’t mean you can run off deficits forever, but some people are obsessed with it.”

“Small deficits are like a balanced budget.”

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While it’s true that money that goes to servicing the debt could be directed to social programs, 70 per cent Canada’s debt is domestic, according to Askari, meaning the majority of the money borrowed comes from pension plans and Canadian bonds.

“Sometimes when people talk about repaying the debt they talk about it as if it’s evaporating into the air,” he said. “It’s actually going back into the system, back to Canadians.”
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