By continuing to accumulate deficits without a plan to return to budget balance, Ottawa opted for a risky strategy that may be accompanied by an invoice salt for the next generations, argues a study.
January 15, 2020 20h40
Updated at 23h41
Invoice salt for future generations?
The canadian Press
MONTREAL — continuing to accumulate deficits without a plan to return to budget balance, Ottawa opted for a risky strategy that may be accompanied by an invoice salt for the next generations, advance a study by the Centre for productivity and prosperity of HEC Montréal.
If the document, unveiled Wednesday, conceded that the federal government has won its bet by filing budgets with red ink to stimulate the growth between 2015 and 2018, the authors estimate that the situation has changed.
“The economic growth is relatively good and there is no recession in sight, and observed, – has explained the director of the Centre and professor at HEC Montréal Robert Gagné, during a telephone interview with The canadian Press. The data on the labour market are favourable. If it is not a question of the conditions for achieving a balanced budget, that is what it takes?”
Taking into account accounting adjustments, the Center’s study estimates that the federal government has accumulated 56.5 billion $ deficits between 2015 and 2018.
While the federal minister of Finance, Bill Morneau, is expected to table its budget in march, Mr. Gagné believes that Ottawa should take advantage of the year to commit to rebalance the public finances. In his opinion, it would be “fast” by limiting the growth of spending to inflation.
In his economic update filed last month, the grand treasurer of the country was a deficit of 26.6 billion dollars, or nearly $ 7 billion more than announced in the last budget. The deficit is expected to widen further to $ 28.1 billion in 2020-2021, and then decreased gradually up to $ 11.6 billion by 2024-2025.
The Trudeau government has justified its approach by noting that, in spite of spending higher than income, the ratio of debt in relation to gross domestic product, adjusted to certain risks, is expected to decrease gradually to reach 29.1 % by 2024-2025, the lowest level since 2008-2009.
Nevertheless, according to the forecasts of the economic update, the federal debt is expected to be $ 713 billion $ at the end of the current fiscal year and reach about 810 billion $ in 2024-2025.
Without wishing to show an alarmist, Mr. Gagné believes that the current strategy of Ottawa sends a message that the federal government can “borrow at infinity”.
For the time being, the impacts are quite limited, since, in 2018, the debt service only accounted for 7 % of revenue for government, “a weight significant when one considers that this position would occupy alone more than one-third of the revenue of the federal government in the mid-1990s”, highlights the study.
At a certain point, the interest rate will not be at levels as low as the one observed at the present time, argues the Centre for productivity and prosperity, who believes that these are the next generations who will have to pay the bill.
“Just a few percentage points [of increase], and the situation could go awry pretty quickly, said Mr. Gagné. For the moment, the indicators are quite positive, but this will not last. The day will come an economic shock, it will be shopped to the disorder in having accumulated a debt to the downright useless.”
According to the document, it is sufficient to bring the terms and conditions of loans medium-sized the federal government at the level of 2006 to pass the burden of debt service to 1567 $ per capita, which represents an increase $ 940 per capita, compared to the current average.
Thus, a sudden rise in interest rates could “potentially jeopardize intergenerational equity”, emphasizes the document.
Among its recommendations, the study calls on the federal government of”imperative to re-enable the balanced budget legislation introduced in 2015 and repealed a year later by the new government”.