As part of our federal election coverage, Investment Executive explores the positions of the major federal political parties on the top issues affecting the financial services industry.

Here we look at where the parties stand on debt reduction:

Producing balanced budgets every year and reducing debt are high on the to-do lists of the Conservatives and Liberals in the federal election campaign, but the NDP has committed only to balanced budgets.

The Conservatives promise to reduce debt by at least $3 billion a year; the Liberals would reduce debt to 20% of gross domestic product by 2020. Debt is not an issue for the NDP.

The Conservatives’ commitment results in more debt reduction. Federal debt was $499.9 billion or 38.7% of GDP at the end of fiscal 2005. Paying off $3 billion a year reduces the debt/GDP ratio to 19.5% by fiscal 2018. Two years later, the ratio would be 17.5%. This assumes economic growth averaging 3% a year and inflation, as measured by the GDP price deflation, of 1.7%. Note that the debt doesn’t go down that much, just to $454 billion but GDP would be almost twice as big, at $2.7 trillion vs an estimated $1.4 trillion in 2005.

The Liberals introduced legislation before the election was called that would force the government to use one-third of any unplanned surpluses, beyond the $3 billion contingency reserve, for debt reduction. One-third of the rest of the unplanned surpluses would be used for personal tax cuts and the other one-third for new investment. Unused portions of the contingency reserve automatically go to debt reduction.

Neither the Conservatives nor the NDP say in their platforms that they will use the contingency reserves and the economic prudence, which were a key part of the Liberals successful deficit reduction plan and which they continue to use.

The contingency reserves are for unexpected expenditures. They have normally been $3 billion a year, although there have been years when they have been lower.

The economic prudence is a reserve to be used if revenues fall short of expectations because of weaker-than-anticipated economic growth. It is $1 billion for the first fiscal year covered by a budget, $2 billion for the second, $3 billion for the third, $3.5 billion for the fourth and $4 billion for the fifth. The amount is removed for the current fiscal year when it is half over and goes into general revenues.

The Tories are critical of the Liberals for running such large unplanned surpluses. But leaving out these sensible budgeting aids isn’t a good idea. Although strong economic growth and additional revenues because of unexpectedly high oil prices have produced higher-than expected revenues in recent years that may not always be the case.

The Conservatives believe that their platform would cost less than the Liberal’s program. They say it would leave $22.7 billion in unallocated money over the next five years, even after paying down $3 billion in debt each year. Their calculations indicate that the Liberals platform would leave only $13.4 billion extra. The Liberals counter that the Conservatives’ plans include undisclosed cuts in program spending of $26 billion.