Picking a federal fiscal anchor is not enough—you must stick to it
The Trudeau government will table its next budget on March 28. According to the Parliamentary Budget Officer’s latest fiscal outlook, federal debt in 2023 is expected to increase relative to the size of the Canadian economy, which would violate the Trudeau government’s stated fiscal anchor.
Fiscal anchors help guide policy on government spending, taxes and borrowing and prevent a deterioration in the health of government finances, with an eye on ensuring debt is sustainable for future generations.
After taking office in 2015, the Trudeau government targeted a fiscal anchor of balancing the budget by 2019-20. When the government realized it would not achieve this goal, it shifted the goal posts and selected a new fiscal anchor—shrinking the debt-to-GDP ratio. This is the preferred fiscal anchor for many economists because a shrinking ratio indicates the country is able to pay back its debt.
However, the government was also unable to achieve this goal. The 2019 fall fiscal update revealed the government had violated its fiscal anchor before the pandemic, as the debt-to-GDP ratio ticked up slightly from 30.8 to 31.0 per cent.
Then, as COVID precipitated hundreds of billions in emergency spending and deficits, debt as a share of the economy spiked to 47.5 per cent in 2020-21. Afterwards, as some of the temporary spending was unwound and the economy rebounded, the ratio levelled off and stabilized again around 42 per cent in 2022-23. Following a period of uncertainty, the federal government recently recommitted to a declining debt-to-GDP ratio as its fiscal anchor.
While it’s a good sign the government is once again adopting a fiscal anchor, it’s been more than willing to abandon its anchor whenever convenient. And it’s failed to achieve its own goals for balanced budgets or a declining debt-to-GDP ratio. As the old adage goes, judge me by my actions, not my words.
According to a recent analysis, there’s a 30 per cent chance the federal government will violate its fiscal anchor of a declining debt-to-GDP ratio over a 10-year time horizon and a 53 per cent chance over a 20-year time horizon. Why? Because Canada will likely face one or more economic slowdowns or recessions in the coming decades, which will increase spending, reduce revenues and result in debt accumulation.
While that analysis shows the government is unlikely to achieve its fiscal anchor over the long-term, there are concerns about the short-term, too. The PBO’s forecast indicates the federal debt-to-GDP ratio is on track to increase between 2022-23 and 2023-24. Put differently, the government could violate its own fiscal anchor only a short while after re-establishing it.
By continually abandoning or violating its own chosen fiscal anchor, the federal government would ensure the metric becomes meaningless. If the fiscal anchor is meaningless because it’s not adhered to, then the government is operating as a boat without a rudder—there’s no direction or guiding principles for finances. There’s nothing to ensure the government is disciplined with spending or keeping debt in check. Without fiscal rules, the process becomes entirely governed by politics rather than sound management of public finances.
It’s easy to imagine a situation where federal finances quickly spiral out of control. If the stakes holding down the tent are fragile or removed completely, the tent only needs a gust of wind to bring impending disaster. In the 1990s, federal finances reached a near fiscal crisis when interest costs consumed more than one out of every three dollars of revenue, largely due to decades of persistent deficits and fiscal mismanagement by successive governments.
Picking a fiscal anchor is important to ensure discipline in government spending and borrowing. Sticking to that anchor is even more important. Right now, it appears the federal government is set to abandon its self-imposed rules once again—to the detriment of Canadians.