With several elections looming in the coming year, all the budget making we’ve seen in recent weeks is more about politics than sound economics. Politicians are scrambling to pick off voters with various bribes. As the federal and most provincial governments relentlessly increase our debt, they have no time to worry about the inevitable reckoning that will come when their budget plans are blown out of the water by a recession.
Experts will properly evaluate budgets in terms of their impact on the economy. But economists’ views have little to do with political budgeting. Politicians budget using three golden rules.
Rule #1: Hide the deficit as much as possible
Politicians will push deficits off the balance sheet as far as they can bend the rules to do it. Case in point: Ontario cutting $25 billion in today’s hydro costs by stashing $45 billion of future interest and debt repayments in Ontario Power Generation’s books.
Other governments play similar tricks. They’ve generally stopped counting capital expenditures as spending to make deficits look smaller (they might itemize capital depreciation costs, but those are typically much smaller). As the accompanying table shows, while Quebec and B.C. have declared a budget “surplus,” their debt is actually rising. (Capital budgets are theoretically sound for businesses, where investment can increase future profits. But plenty of public projects simply don’t contribute to growth, and politicians will often reframe obvious social spending — like hockey rinks and low-income housing — as capital spending.)
As the table shows, the official budgets of the federal government and four largest provinces total $32.5 billion according to the “official” deficit. However, if we calculate deficits as the change in net financial debt — including capital debt financing — the deficit becomes $49.4 billion. More than 50 per cent higher.
But even deficit calculations using net debt are measured improperly. They still don’t account for future liabilities associated with pension funding, the future growth in costs for health and supports for the rising number of seniors, or the coming drop in tax revenue as the population ages and the workforce shrinks. Politicians will always avoid providing a full accounting of liabilities. We should be demanding budgeting laws that make them do it.
Rule #2: Find a path to balance by hoping for the best
Alberta politicians love to show how the budget will eventually balance itself just as soon as oil prices are much higher than they are right now. Premier Rachel Notley’s 2018 budget does that just as much as past PC budgets from Ed Stelmach’s and Don Getty’s governments.
Meanwhile, last week’s Ontario budget — which substantially increases debt financing in 2018–19 by $11.8 billion and projects ongoing deficits until at least 2024–25 — assumes there won’t be a single recession in Ontario over the next six years (despite it having been 10 years now since the last one). With Ontario’s net debt at 37.1 per cent of GDP — on top of federal debt at 30.1 per cent of GDP in 2018–19 — Ontario taxpayers are perilously exposed to a potential economic shock. Quebec is still paying for past sins that led to it previously reaching the second-highest debt-to-GDP ratio (after Newfoundland) at 47 per cent, now down to 43 per cent.
Now the federal government no longer has a goal to balance the budget, promising instead to ensure that debt does not rise faster than GDP. The federal Liberals are joining their Ontario cousins in desperately crossing their fingers that no recession will show up and shred their revenue projections.
You can tell how much all of these plans are built on the fragile foundation of hope by how nearly every spending program is labeled as a supposedly wise “investment” in the future. But you won’t find a shred of actual evidence that such investments increase growth. Ontario says it’s “investing” over $12 billion more in health care, child care, seniors’ support and subsidies. Taxpayers should be able to sue politicians for misleading advertising.
Rule #3: Make someone else pay for spending so your political base doesn’t have to
Politicians would love it if they could only raise taxes on the rich, who can’t vote in large numbers. But they’re not a big enough group to fund spending, which now comprises roughly 40 per cent of the economy. So that means hiking taxes on the middle class or specific sectors or industries, while cleverly offering subsidies or tax relief to certain strategic voting groups (think: seniors) to keep them on side.
Even more common, and far worse, is the entrenched practice of spending money on today’s voters using debt saddled on future taxpayers who have no say about it. Ontario’s new budget is just the latest, flagrant example, but the federal government’s decision to rescind the increase in age eligibility for old-age security also sticks today and tomorrow’s kids with a big bill. And Alberta is so quickly accumulating debt for future generations to work off that its gross debt will soon be 25 per cent of GDP by 2023.
To protect future taxpayers from vote-seeking politicians, we should constrain total government liabilities — public debt and other unfunded liabilities — to be capped at no more than a certain percentage of revenues or GDP. Canadians won’t see a return to sound budget making until we come up with a way to effectively restrain politicians from buying-off voters with money that belongs to our kids, grandkids and great grandchildren.
Jack Mintz is president’s fellow at the University of Calgary’s School of Public Policy.