What’s missing from the deficit debate? Any plan to eliminate it

When Finance Minister François-Philippe Champagne appeared before the House of Commons finance committee this week, Conservative MP Pat Kelly attempted to corner him with a complicated question disguised as a simple one.

“Minister, what year will the budget be balanced?” Kelly asked.

Champagne spoke a few dozen words in response, but failed to answer, so Kelly tried again. And then again. The discussion devolved into a debate about the existential nature of an answer. 

In fairness to Kelly, it’s not unreasonable to wonder what the federal government’s fiscal track might look like. 

In fairness to Champagne, Kelly’s question wasn’t answered by the platform the Conservative Party ran on this past spring either — a government led by Pierre Poilievre would have run deficits through at least 2028.

Eventually, Kelly suggested that, based on a projection prepared earlier this year by the CD Howe Institute, the budget deficit could reach $90 billion as the federal government moves to rapidly increase defence spending.

But now Champagne had a question for Kelly.

“Are you suggesting that we should not meet our NATO commitments to defend the sovereignty of Canada?” Champagne asked.

“No,” Kelly responded, “I’m suggesting that you should answer a question.”

The exchange between Kelly and Champagne ended shortly thereafter with all questions unanswered. 

The debate about the federal deficit — or, more specifically, the health and wisdom of federal fiscal policy — remains something of a phoney war, with little substantive engagement. If, for instance, anyone has a plan for balancing the budget while significantly increasing defence spending, they aren’t saying so.

But perhaps, with a new federal budget set to be tabled on Nov. 4, a more serious debate is about to break out.

The budget conversation was given a sudden jolt two weeks ago when the parliamentary budget officer declared that federal finances were no longer in a sustainable position, a development that he framed in terms like “shocking” and “stupefying.” The federal government, he said, was at the “precipice.”

“When will the prime minister stop his out-of-control spending?” Conservative Leader Pierre Poilievre asked the government earlier this month. “Is it when he is over the edge of the cliff?”

The irony of the budget officer’s warning attracting attention now is that few fiscal hawks seemed dissuaded from worrying about the deficit over the past decade even while the PBO was consistently reporting that federal finances were, in fact, sustainable — that, despite political concerns about the deficit, the federal government’s debt-to-GDP ratio was still expected to decline over time.

The new warning was based on a projection that the federal government’s debt-to-GDP ratio was now likely to increase over the medium term — that is, that persistent budget deficits in combination with slower economic growth would result in the federal government’s debt growing faster than the economy. 

But the PBO’s sudden and colourful change of tone was second-guessed by former budget officer Kevin Page, who quibbled with both his successor’s choice of words and his conclusion about the sustainability of federal finances. Yves Giroux, who was PBO until August, also ventured that the current PBO’s comments were a “bit premature.”

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For its own part, the federal government can point to a number of fiscal metrics by which it compares favourably with other national governments in the G7. 

“We have the strongest credit rating in the world, a AAA from S&P and Moody’s; the lowest deficit in the G7; the lowest debt level in the G7; the lowest net debt-to-GDP in the G7,” Carney said in the House this month.

But among those calling for new discipline is no less than the prime minister himself — “we are going to bear down on spending,” Carney told a conference in Toronto this week, reiterating an intent he has signalled for months.

When the federal government releases its budget next month, it will certainly show a deficit and that deficit will likely be some kind of nominally big number that will invariably lead news reports and commentary. But the budget might also include the first hints of a program review that could ultimately result in the most aggressive spending cuts — or re-allocations — in 30 years.

Carney has said there are “tough choices” to be made. On Friday, he said the government would make “responsible and pragmatic choices.”

Whichever adjective you prefer, the result is potentially the same: that some Canadians will not be perfectly happy with the choices.

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As John Lester, an economist with the CD Howe Institute, wrote in August, the Carney government’s spending review is actually quite narrow. Even while it might deliver upwards of $20 billion in cuts, it is focused on a relatively limited subsection of federal spending. It doesn’t include major transfers to provinces, major transfers to individuals or tax expenditures (the various subsidies and benefits delivered through the tax system). 

But in making some “tough” or “pragmatic” choices, the Carney government might at least provide some useful clarity: both eliminating some of the most obvious excesses (eg. spending on outside consultants) and making clear that sharp spending reductions are rarely painless or free of consequence.

Despite a decade of fussing and fretting about the federal government’s finances, driven by the Trudeau government’s decision to depart from the balanced-budget orthodoxy of the 1990s and 2000s, there has not really been much serious political debate about any real trade-offs. And regardless of whether the federal government is actually approaching any kind of fiscal “cliff,” trade-offs might actually be necessary now.

That will presumably be the prime minister’s argument: that cuts (and the deficit) are necessary because, in this uniquely challenging moment, the federal government needs to make significant investments in things like defence, infrastructure and housing. And in that sense this fall’s budget might finally sharpen a debate that has been had in only the fuzziest of terms for the last 10 years.

Would the Conservatives make significantly different choices? Are even deeper cuts necessary? Is it time to talk about raising new revenue?

In the meantime, if anyone has a plan for balancing the budget while bringing defence spending to five per cent of GDP, they are welcome to table it.