Economic analysis

The case for nasty, dirty, evil deficits

Paul Wells explains why budget debate should not be about spending alone
Canada's Prime Minister Justin Trudeau (L) and Finance Minister Bill Morneau walk to the House of Commons to deliver the budget on Parliament Hill in Ottawa, March 22, 2016. (Patrick Doyle/Reuters)
Prime Minister Justin Trudeau and Finance Minister Bill Morneau head to the House on budget day. (Patrick Doyle, Reuters)

We are having to get used to some new ideas in Ottawa. Bill Morneau brought down the first budget of the second, cuddlier Trudeau era the other day, and—wait, is this the second Trudeau era? Perhaps it’s the third. After all, Joe Clark’s nine months in office divided Pierre Trudeau’s tenure into a first, long stint, from 1968 to 1979, and a shorter burst from 1980 to 1984. That sequel was all killer, no filler: it included victory in the first Quebec secession referendum, a rewritten Constitution and a world peace tour. (Actual world peace came later. In fact we’re still waiting. But the Cold War ended six years after Pierre Trudeau’s peace tour, so, you know, there you have it.)

But I digress. The broad outlines of the first Morneau budget are well known: Billions for public infrastructure, billions for health and education in Indigenous communities, taxes down over here but up over there, and a whopping deficit. To be followed by years of more whopping deficits in years to come. Those deficits, and the context in which they are being incurred, are one of the big stories out of this budget.

But another is subtler, and seems healthy. Two of the big programs in a budget full of big programs are strongly means-tested, which means you get more benefit the lower your income. This is true for aid to students, because enhanced Canada Student Grants will go, disproportionately, to the lowest-income students; and because a new income cutoff will ensure that no graduate who isn’t earning at least $25,000 a year will be required to repay student loans.

More significantly, it’s true of the Canada Child Benefit, which pays sharply declining amounts as incomes climb beyond what could reasonably be called middle-class. If your income is high enough you don’t get any benefit at all.

This program design breaks a taboo that never made sense to me. It’s often argued that social programs must be universal because the rich won’t pay, through their taxes, for programs that don’t benefit them. So for years I’ve heard arguments for lower university tuition. Even though plenty of people can afford to pay any price for university. Even though their money would help improve access for others. And when Trudeau argued against a universal child benefit, both Stephen Harper and Tom Mulcair criticized him.

Now we will see if support for family benefits collapses now that not every family gets a benefit. I suspect it won’t.

The budget’s big deficits—nearly $30 billion this year, falling to $14 billion at the end of the Liberals’ mandate, assuming they don’t come up with any new spending ideas—received much more attention. The size of the deficits blows a Liberal campaign promise to shreds, as does the news that Trudeau has no intention of balancing the budget before he faces the voters again. This is what many people, including Stephen Harper, said would happen: that when Justin Trudeau promised a more active government and, eventually, a balanced budget, he really only meant the first part.

The early budget coverage suggested a string of deficits will lead where strings of deficits led in the ’80s and ’90s: to an accumulated debt that, if it had continued snowballing, would have been unsustainable. It took a few days for observers, including the University of British Columbia economist Kevin Milligan, to do the math. Federal government debt as a fraction of the economy is half of what it used to be. Interest rates, which increase the cost of carrying debt, are comically low. (Provincial debt isn’t cause for immediate concern either: where it’s highest, in Quebec and Ontario, it’s finally started to decline.) Deficits on the scale of Trudeau’s are sustainable for many years to come—unless interest rates spike, in which case we’ll be into the soup again, but let us not borrow trouble.

The whole point of balancing the budget in the ’90s was that politics, understood as a debate over the cost and ambition of government, had become impossible. The kind of government many Liberals wanted was unaffordable because the cost of servicing that jumbo debt crowded out other uses. The goal of those first epic Paul Martin budgets was to get back to a point where the role of government could be the subject of healthy debate, because both a leaner government and a more active government were at least feasible. The debate could be on the merits.

That’s the situation Justin Trudeau has inherited. Gushers of new spending will offer both benefits—better roads, cleaner water—and dangers. The sponsorship scandal of the late Chrétien years was possible because it was obvious to every scoundrel with Liberal friends that spending on national unity would not receive close scrutiny from a government that was desperate to be seen doing something on the file. A government that considers the scale of its spending to be proof of its virtue is an easy mark for hucksters and worse.

So a more active government won’t always be wise. But its activism is sustainable. Which means the political debate will have to be over the wisdom of all this spending, not the mere fact of it. It’s a new time.