The federal government has repeatedly shifted the goal posts on its own “fiscal anchors.” This bulletin examines the robustness of the current “fiscal anchor” to reduce the debt-to-GDP ratio by the government’s first mandate.
The 2016 federal budget confirmed the government’s plan to run long-term deficits–$113.2 billion over the five-year plan. Budget 2016 increases program spending by 7.6% in 2016/17, following a 6.7% increase in 2015/16.
A closer look at the government’s spending plan reveals a major slowdown in spending growth during the last three years. Specifically, the federal government is proposing to reduce spending as a share of the economy and per-person spending (inflation-adjusted) from 2017/18 to 2020/21. Decreasing the size of the federal government does not square with the government’s view that government spending drives economic growth.
Using three alternative spending scenarios from 2017/18 to 2020/21, we estimate the potential impact on the five-year deficit plan and debt-to-GDP assuming:
- Program spending increases at the rate of population growth plus inflation
- Program spending increases at the rate of economic growth
- Program spending increases by 6.0% annually (the average growth rate of first two years of the 5-year budget plan)
We estimate that over the course of the government’s fiscal plan the cumulative federal deficit could reach up to $196.0 billion. We find that the debt-to-GDP ratio under three different spending scenarios would be greater in 2020/21 than in 2015/16. The federal government is therefore unlikely to meet its latest target of reducing the federal debt-to- GDP by the end of its first mandate.
