Ottawa depending on economic blue skies to balance the budget
There’s finally some good news for taxpayers: Instead of balancing the budget in 2070, the Parliamentary Budget Officer’s numbers now show Canadians can look forward to a balanced budget in only … wait for it … 20 years.
Last year the Canadians Taxpayers Federation used PBO data to show the feds wouldn’t balance the budget until 2070. This year, the PBO’s data shows they will balance the budget in 2041, just less than two decades from now. Is that the restraint Finance Minister Chrystia Freeland is talking about when she touts the government’s “fiscal prudence”?
Now brace yourself for the bad news. The feds won’t balance the budget in 2041 if: interest rates tick up, the economy doesn’t grow every year without fail and politicians can’t summon the spine to say no to new spending.
To balance the budget two decades from now, the average interest rate charged on the debt must be about 2.5 per cent. Right now, according to the PBO, the government is paying 1.7 per cent. Maybe interest rates will stay that low forever. Maybe. But 2.5 per cent is lower than interest rates were every year between 1991 and 2015. And following July’s largest one-time interest rate hike since 1998, Bank of Canada Governor Tiff Macklem wrote in the Post that “interest rates will need to rise further.” So favourable rates are far from a sure thing.
The PBO’s data also assumes eight per cent nominal GDP growth this year, five per cent next year, then four per cent every year until the budget is balanced in 2041. Maybe Canada will luck out with two decades of uninterrupted growth — something that hasn’t happened since, well, ever — but what if we don’t?
Here’s the biggest hurdle for this government: the PBO’s data only “reflects federal and provincial budgets from spring 2022.” That means a balanced budget in 2041 relies on politicians not spending any money that’s not already included in Budget 2022.
But Finance Minister Freeland has already acknowledged that Budget 2022 doesn’t include everything the Liberals promised in last year’s election. “We will do more things over the next three budgets,” she has said.
Given the government’s track record, assuming it won’t find new ways to spend money is like assuming you’re going to pass on a second piece of pumpkin pie on Thanksgiving: a great idea in principle that is never gonna happen.
The Trudeau government was spending more money before the pandemic than Ottawa did during any year of the Second World War, even after accounting for inflation and population growth. And this year the government wants to spend $90 billion more than that.
Even if the feds do finally balance the budget in 2041 thanks to relatively low interest rates and steady economic growth, interest charges on the government credit card will have cost taxpayers $802 billion over those two decades. That’s $18,000 for every Canadian. One of the main problems with never-ending deficits is precisely that: the more the government borrows, the more interest taxpayers are forced to pay instead of that money being used to improve government services and lower taxes.
And here’s the other issue. Years of deficits and higher borrowing costs will put pressure on politicians to start looking for new taxes. Though the prime minister promised not to raise taxes your tax bill is going up this year if you make more than $40,000.
Of course, there’s nothing technically stopping the government from balancing the budget long before 2041. It could balance the budget as early as 2024 if it brought its spending back to the all-time highs it established pre-pandemic, even adjusting upward for inflation and population growth since then.
The feds could balance the budget, waste less money on interest and avoid future tax hikes by mustering a modicum of restraint. It’s time for Ottawa politicians to take deficits seriously again and tighten their belts like the rest of us.