The federal government should be prepared to run larger-than-promised deficits in the face of the faltering economy, argues a report published Wednesday by Montreal-based National Bank Financial Inc. (NBF).
Ahead of the upcoming federal budget, there’s a growing consensus that the struggling Canadian economy needs fiscal stimulus, the NBF report on government credit notes.
The question, the report says, is how much, in what form, and over what timeframe, should that stimulus be delivered.
The federal government should not impose an arbitrary limit on deficits if it hopes to truly help kickstart growth, the NBF report argues. “The irony is that the more real and nominal growth falters, the more the federal government ties its own hands by committing itself to an arbitrary debt burden target,” it says.
Previously, the government promised to limit the deficit to $10 billion a year, and to return to fiscal balance by the end of its mandate. “Given our economic forecast, achieving such arbitrary fiscal objectives would entail more than just putting off stimulus, but actually require higher taxes and/or reduced spending in the years’ ahead. And tighter federal fiscal policy is about the last thing a moribund Canadian economy needs right now,” the NBF report says.
Ottawa’s underlying fiscal position for 2016-2017 “has deteriorated by $15 billion since April’s budget and $9 billion since November, the NBF report estimates. “The size of the fiscal miss versus earlier official forecasts gets bigger the further out you go.”
Indeed, the federal government pledged $38 billion of net new spending over four years during the election campaign, the NBF report notes, which, combined with the gloomier economic outlook, leads to an uglier fiscal picture. “The combined impact of a weaker underlying economy and pledged stimulus could, all else equal, produce a cumulative deficit of $90 billion over this government’s four-year mandate,” the NBF report says. “That represents a net erosion of $100 billion relative to a budget plan presented not quite 10 months ago.”
Nevertheless, the NBF report argues that more government spending is what’s required right now, not less. “When it comes right down to it, running deficits of $30-35 billion (something like 1.5% of GDP) for a few years isn’t going to erode Ottawa’s long-term fiscal sustainability,” the report says.
“Yes, deficits of that magnitude in an environment of slower nominal growth might technically add a couple percentage points to the government’s debt burden. But given past success in wrestling the federal debt-to-GDP ratio down to size (and given rock bottom interest rates fundamentally bolster debt affordability now and into the future) Canada needs to ask itself: do we need the federal debt burden to keep falling forever and ever until the end of time? Probably not,” the NBF report concludes.