The Parliamentary Budget Officer (PBO) has handed the new Liberal Government its first bit of bad news.  In his latest Economic and Fiscal Update, the PBO is forecasting deficits of about $4 billion a year to 2020-21. His latest Update does not include the cost of the Liberals’ election promises.

From an economic perspective, this poses no problem whatsoever. The deficits are not large, amounting to only about 0.2% of GDP per year. More Importantly, the federal debt to GDP ratio is still forecast to decline – from 30.8% in 2015-16 to 26.2% in 2020-21. This is still the lowest among the G-7 countries. 

Unfortunately, as was the case for the last four years, economics doesn’t matter - only politics.  During the election campaign, the Liberals based their fiscal strategy on the April 2015 Budget fiscal projections, adjusted marginally based on a July PBO report. That adjusted forecast projected a surplus of $7.2 billion in 2019-20, allowing the Liberals to claim a balanced budget in 2019-20, after incorporating the impact of their election promises.

With PBO’s current Update, a balanced budget in 2019-20 is off the table.  The new Minister of Finance has promised to deliver an Economic and Fiscal Update sometime in December.  That Update will be under intense scrutiny. 

The attached table updates the PBO’s projections to include the net impact of the Liberals’ election promises. In addition, we have added a $3 billion per year Contingency Reserve.  Finance Minister Paul Martin first introduced this reserve in the 1990s, in order to ensure that the deficit targets would be realized.  If not needed, it would be used to reduce debt and not to fund new policy initiatives.

Incorporating the impact of all the election promises and the Contingency Reserve results in a surplus of $1.6 billion in 2015-16, followed by deficits of $16.5 billion in 2016-17, $19.4 billion in 2017-18, $17.1 billion in 2018-19 and $14.2 billion in 2019-20 (Table 1). The increase in the surplus in 2015-16 reflects the implementation of the various tax measures effective January 1, 2016, which provide the Government with some additional funding.  With the exception of $100 million to the United Nations for refugees, all other spending initiatives are assumed to be effective April 1, 2016. The federal debt would be increased by $65.6 billion by 2019-20.  However, the debt to GDP ratio would still continue to decline, from 30.7% in 2015-16 to 29.1% in 2019-20 and continue to be the lowest in the G-7

Here is some advice for your first fiscal update. Stop trying to be like the previous Conservative government.

The day of “fiscal honesty” was bound to arise, better sooner in your mandate than later. If you want to establish your fiscal credibility, your first step must be to be honest and realistic about your economic and fiscal prospects. You will not be able to balance the budget in 2019-20, given the change in economic circumstances. Spreading the initiatives over a longer time frame would reduce some of the pressure in the short term but likely increase the deficit over the medium term.

Your election platform already includes $3 billion in savings from a review of programs and tax expenditures.  Additional spending reductions would be extremely difficult, given the restraint measures imposed by the previous government.


Table 1: Summary Statement of Transactions: $ billions













PBO Budgetary Balance: Nov. Update


















   Liberals’ Election Promises






   Contingency Reserve






   Net Impact












Adjusted Budgetary Balance






   Per cent of GDP












Federal Debt






    Per cent of GDP












Memorandum Item






   Budgetary Balance (Election Platform)













Everyone knows it is not possible to meet your balanced budget commitment in 2019-20 without increasing taxes.  They are simply waiting to see if you are smart or honest enough to admit it.  Obviously, you are not going to raise taxes. Clearly you will have to set priorities and make choices. Some election promises will have to be postponed. But you need to establish from the very start of your mandate as Minister of Finance that you do not intend to plan your budgets based on eliminating the deficit by some arbitrary date. Rather you intend to pursue a budget strategy that will ensure a declining debt-to-GDP ratio over the medium term.  This means keeping the growth of the debt to below the growth of the economy.

The reality is that you will not be able to implement a Liberal policy agenda by following a Conservative agenda that all deficits are bad and that you must take immediate action to eliminate them. To do this would be to admit that the Conservatives won the election.

Now is not the time for more austerity.  The economy is seriously underperforming relative to its potential and future growth prospects are not good. Austerity was the wrong policy for the last five years and it is the wrong policy now. Your first order of business should be to repeal the Balanced Budget Act.

During the election, you committed to running a credible fiscal policy. This means being realistic, being sustainable, being prudent, and being transparent. If you fail on any of these four principles, either in your December Update or your first budget, you will lose credibility. Credibility is easy to lose but difficult to obtain.

To be realistic, you must acknowledge that it will not be possible to balance the budget by 2019-20. The economy is simply too weak and the prospects are not good. Second, you intend to maintain a sustainable fiscal policy that supports economic growth while committing to a declining debt burden over the medium and longer term. Third, because of the high uncertainty surrounding the global economic outlook, you intend to keep a $3 billion contingency reserve.  Finally, be transparent. You cannot fool anyone by trying to “adjust” the economic and fiscal numbers, as the Conservatives did. Being open and honest is the best policy. Indeed, it is the only defensible policy.

The bottom line is that to be credible, you need to run a Liberal fiscal policy not a Conservative fiscal policy. After all that is what got you elected.

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