Fact check: Can the federal deficit be eliminated in 10 years without cuts?

The federal government is running a large budget deficit — according to recent projections from the Parliamentary Budget Officer (PBO), it’s on track to spend about $138.2 billion more than it’s taking in this year. That’s compared to a $334.7 billion deficit in 2020-21. The reason for these big deficits is primarily increased spending and other effects on the economy relating to the COVID-19 pandemic.

So is it possible to get from the current deficit in the hundreds of billions to balanced books within a decade?

On Tuesday, Conservative Leader Erin O’Toole said a government led by him would bring the federal books back to balance within 10 years — without cutting government spending outside of rolling back temporary support programs related to the pandemic.

“We’ll grow spending in a few key areas, like health care and wellness, while keeping it under control everywhere else,” O’Toole said. He added that his party’s fiscal policy would “responsibly wind down emergency supports, get the economy growing,” and “restrain the growth for spending.”

At an announcement for the Liberal Party’s platform Wednesday, Prime Minister Justin Trudeau called the proposal to balance the budget without cuts “magical thinking.”

In this fact check, CBC News asked an expert.

Liberal Leader Justin Trudeau says O’Toole’s plan is ‘magical thinking.’ (Sean Kilpatrick/The Canadian Press)

Deficit falls as pandemic ends

Trevor Tombe is a professor of economics at the University of Calgary and co-director of Finances of the Nation, an online publication which features analysis and commentary on Canadian fiscal policy from a non-partisan perspective.

“We should not look at deficits right now as indicative of what’s normally the case,” Tombe said. “These are exceptionally high levels of borrowing.”

Temporary emergency government benefits tied to the pandemic, such as the Canada Response Benefit (CRB), the Canada Emergency Wage Subsidy (CEWS) and more, are expected to end as businesses open up and life returns to normal. 

The end of these programs is going to have big implications for federal coffers.

According to an outlook from the PBO released near the start of the election campaign, the deficit is projected to decrease to just under $25 billion by 2025-26.

Parliamentary Budget Officer Yves Giroux. The PBO projects the federal deficit will decrease to some $25 billion by 2025. (Adrian Wyld/The Canadian Press)

“That gives you a better sense of scale in terms of the size of the deficit the next government will need to think about,” Tombe said.

While that is a projected deficit cut of more than $100 billion in five years, the government is still projected to be in the red about $25 billion. What options does a government have to eliminate it — especially if cuts to government spending are off the table?

Growing up

O’Toole is not wrong to look to economic growth as a plausible means of eliminating the deficit, Tombe says.

“A growing economy means higher levels of income. A growing population is going to mean more taxpayers. So, roughly speaking, federal revenue is going to grow along with the size of the Canadian economy,” Tombe said.

But would annual economic growth rates have to be at unrealistic or unprecedented levels to achieve balance? Tombe says they wouldn’t. He estimates that an average real gross domestic product (GDP) growth of around 1.8 per cent per year would allow the federal government to balance the budget by 2031.

“If revenues grow, as they normally do with the economy overall, then by 2031 we’re looking at federal revenues of about $560 billion, give or take, that year,” he said.

“In terms of total spending, if it grows at the rate of population plus inflation, then we’re in a situation where, in 2031, we have about $560 [billion] — just a little shy — in total spending. So that would be your point of balance.”

This can even be done without necessarily increasing taxes, Tombe says.

“The pure arithmetic is quite straightforward,” he said.

Increased health spending

It’s important to note that O’Toole is proposing no reduction to overall federal government spending. His proposal includes a spending increase in health initiatives, for example, so there will likely be cuts in some other areas.

“All governments cut something, somewhere, and they increase spending elsewhere. Absolutely every party has something that they would cancel,” Tombe said.

The PBO has not yet fully costed the Conservative Party’s platform, so it’s not known how well the those policy proposals fit into the pledge to balance the budget.

And while the Liberals have not formally committed to a similar timeframe for balancing the budget, Tombe says it’s similarly not out of reach should they continue governing.

O’Toole’s proposal echoes the way one of his predecessors as Conservative leader, Stephen Harper, eliminated the deficit in the years following the 2008-09 financial crisis, Tombe says.

The government ran large deficits as part of a stimulus plan. By 2015, federal government spending, adjusted for inflation, was back to 2008 levels and the federal books were balanced.

There’s another way to balance the books. For an example, one can look at the mid-’90s, says Tombe, when Prime Minister Jean Chretien and Finance Minister Paul Martin substantially reduced the amount of federal government spending to balance the budget.

Fact check: true (excluding temporary emergency support programs tied to the COVID-19 pandemic).

View original article here Source