The finance minister said what? Part 5
On July 8, Finance Minister Bill Morneau delivered the federal government’s economic and fiscal “snapshot,” which pins the federal deficit at $343 billion in 2020. The finance minister lauded (yet again) that the government’s fiscal “prudence” over the last several years put federal finances in a strong position to weather the recession, but this is simply untrue.
Fiscal prudence means being careful in the way you make decisions or spend money so that you avoid unnecessary risks. The Trudeau government did just the opposite, indeed, its decision to spend at record levels when times were good has unnecessarily contributed to the dire state of the federal finances.
Perhaps most notably, the finance minister stated that “our fiscal discipline in the years leading up to this… meant that Canada was resilient and ready to face this challenge.”
In reality, however, the Trudeau government has shown little to no regard for fiscal discipline since taking office. Before the pandemic, federal program spending (total spending minus interest costs) was budgeted to reach $9,306 per-person in 2020—the highest level in Canadian history (adjusted for inflation). In fact, the Trudeau government set a new per-person spending record in each of the last three years (2018, 2019 and 2020—pre-COVID). As a result, the Trudeau government ran consistent deficits and accumulated significant debt over its first four years in office.
Indeed, Prime Minister Trudeau’s government was one of only three in Canadian history to accumulate federal per-person debt outside of a war or recession.
The implications of this debt accumulation and the government’s lack of fiscal discipline are perhaps best illustrated using a comparative example. For instance, consider the Chretien government in the 1990’s. After balancing the federal budget for the first time in nearly 30 years, the Chretien government continued to impose strict fiscal discipline on itself by requiring that it consistently balance the budget and achieve surpluses to reduce the nominal value of national debt. The finance minister at the time, Paul Martin, explained that in doing so, Ottawa would reduce its debt load while the economy was strong to prepare for the future.
From 1996/97 onward to the 2008/09 recession, Chretien’s fiscal discipline reduced the national debt (total debt minus financial assets) by $105.2 billion or 18.7 per cent, which helped Canada manage the 2009 recession better than almost any other industrialized country.
In contrast, Trudeau has failed to demonstrate similar fiscal prudence. In fact, the Trudeau government immediately disregarded its commitment to move towards a balanced budget by the 2019/20 fiscal year in Budget 2016, less than six months after the government’s election. Subsequently, the Trudeau government incurred sizable deficits each year, accumulating $84.3 billion in additional debt between 2015/16 and 2019/20, all before the impact of COVID.
Now, imagine that the Trudeau government had instead enforced the “fiscal discipline” it claimed to, and followed fiscal prudence rules of the Chretien government to balance budgets and save during the good times. If the Trudeau government had imposed a budget rule requiring it to run small annual surpluses over the last four-and-a-half years, federal debt would have been reduced by $11.0 billion prior to the pandemic rather than increased by $84.3 billion—a difference of more than $95 billion.
For perspective, that means Ottawa could have entered the recession with $617.9 billion in federal debt rather than the expected $713.2 billion in 2019/20. The Trudeau government could have used this additional financial capacity to cover nearly half of its direct spending in response to COVID, valued at approximately $212 billion, and simultaneously keep the country’s federal debt below $1 trillion. Instead, federal debt is expected to reach almost $1.1 trillion this year.
Minister Morneau and the Trudeau government continue to downplay their lack of fiscal discipline during their time in office. Simply put, had the federal government demonstrated more fiscal prudence in previous years and taken rainy-day budgeting seriously, Canada would be in a much better financial situation than it is today.