Why is Canada’s federal government running a deficit?

Canada’s federal government has embarked on a path of substantial deficit financing with no concrete target laid out of when the budget might be expected to balance.

The deficit will be $5.4 billion in 2015-16, $29.4 billion in 2016-17, $29 billion in 2017-18, $22.8 billion in 2018-19, $17.7 billion in 2019-20 and $14.3 billion in 2020-21—for a total of $118.6 billion.

Given what seems to be a better performing Canadian economy than expected, this deficit financing is now being touted as investment in much-needed physical infrastructure in order to drive long-term growth. Yet, when examined more closely, the evidence for these claims is weak.

First, unlike 2008-09 when GDP actually fell as a consequence of the global financial crisis and Great Recession, Canada today (aside perhaps from Alberta, Saskatchewan and Newfoundland and Labrador which have been hard hit by the fall in oil prices) is not suffering from a deficiency in aggregate demand or consumer spending. While 2015 saw a slowdown in real GDP growth, the economy overall did not contract. Moreover, 2016 has opened up with January showing a robust annualized real GDP growth rate. Moreover, there has also been employment growth with the total number of employed rising from 17.691 million in 2013 to 17.802 million in 2014 and reaching 17.947 million in 2015. The unemployment rate fell from 7.1 per cent in 2013 to 6.9 per cent in 2015.

Second, as a result of the economy continuing to experience growth, there’s not a revenue collapse that might spark a need for extensive deficit financing. The 2016 federal budget documents show total federal budgetary revenues growing from $291.2 billion in 2015-16 to reach $344.4 billion by 2020-21. Based on the budget numbers, the average annual growth rate of federal government revenues between 2015-16 and 2020-21 is expected to be approximately three per cent. Over the same period, expenditures are expected to grow from $296.6 billion to $358.6 billion with an average annual growth rate of approximately four per cent.

Third, while the deficit is now being justified in terms of providing much-needed infrastructure investments to drive long-term growth, the fact is that it’s heavily skewed towards current consumption with large increases as a result of more spending on employment insurance, social security and an enhanced child tax benefit. Indeed, one might argue that most of the new proposed spending on “infrastructure”—green, physical or social—amounts to a relatively small fraction of the coming slew of deficits.

To summarize: Canada’s economic circumstances are sluggish but not terribly dire from an aggregate demand perspective. At three per cent, revenues are projected to grow at a rate that actually closely matches the combined growth rates of population and inflation. Relatively little is being spent on new infrastructure even if one uses the rather broad definition being employed by the federal government.

So why is Canada running a deficit?

Given this evidence one can only hypothesize that we will have deficits not because of any economic crisis but because of the implementation of a political vision that entails a much more activist role for Canada’s federal government. As a result, expenditures will grow faster than revenues.

This activist role is being facilitated by low interest rates that reduce the cost of government borrowing as well as the low debt to GDP ratio acquired from the efforts of previous governments since the mid-1990s. Moreover, this activist vision is putting in place a spending escalator that may inevitably generate the call for new revenues. In the presence of an activist vision of government, the persistent deficit being established may not result in a call for restraint but ultimately become the justification for growing the future tax burden on the middle class.