Canada’s deficits are growing again and so are calls for fiscal discipline. Whenever spending rises faster than revenue, talk turns to “fiscal rules”— hard targets and binding requirements designed to achieve specific bottom-line results within a set time frame.
Calls for such rules are growing. Andrew Coyne, a self-described skeptic, pleads for “some sort of rough-and-ready rule,” while economist Trevor Tombe argues for “clear, precise and actionable fiscal rules to guide policy choices over time.”
If we can use inflation targets to discipline monetary policy, why not apply the same principle to fiscal policy — taxing, spending and borrowing? What’s stopping us?
In short, the answer is nothing. Governments can choose to bind themselves, and many have. But we can do more. Creating an independent fiscal council charged with designing fiscal rules and monitoring compliance would help restore discipline to Canada’s fiscal governance.
We have had fiscal rules before
Fiscal rules gained popularity in the 1990s as the European Union moved toward monetary integration and the launch of the euro. Balanced-budget provisions were deemed essential to meet EU deficit and debt criteria. Other nations — including emerging and developing economies — soon followed. According to the International Monetary Fund’s Fiscal Rules Dataset, more than 120 countries had at least one fiscal rule by 2024.
Canada joined this global trend, particularly at the provincial level. Since the mid-1990s most provinces have implemented fiscal rules. British Columbia led in 1991, and by 2010 eight provinces had balanced-budget legislation. The federal government has been less definitive, settling for an “anchor”— a declining debt-to-GDP ratio.
Why so much cynicism about fiscal rules?
Despite their popularity, many remain skeptical about the effectiveness of fiscal rules while some are outright cynical. Skeptics point to governments’ tendency to abandon rules once they require difficult choices. A recent IMF report found that many countries routinely exceed their own deficit and debt limits, with more than two-thirds later revising their fiscal rules to make them more flexible during economic shocks.
Canada’s experience mirrors this pattern. Provincial governments have suspended or amended rules when faced with revenue shortfalls and the federal government has revised recent debt and deficit projections. Instead of a declining debt-to-GDP ratio, Canada is approaching a fiscal precipice, we are told by the acting parliamentary budget officer. We have abandoned anchors and are blowing through guardrails.
Cynics go further. They see fiscal rules as political theatre — devices to placate voters rather than discipline governments. Either politicians choose rules that can easily be adhered to, or they present data and projections that are congenial to compliance but actually hide liabilities.
From a cynical perspective, the Carney government’s proposal to divide the budget into operating and capital accounts is just another opportunity for manipulation.
The real world of rules
Yet evidence suggests that fiscal rules often work better than critics claim. A study of 74 countries from 1985 to 2012 found that more stringent rules were associated with better budget balances and lower output volatility. Another concluded that strong rules improve fiscal forecasts and credit ratings. Our own research on Canadian provinces showed that the stricter the rule, the better the deficit and debt outcomes.
Rules matter partly because the public does not always reward fiscal generosity. Politicians may be prone to “deficit bias,” but calls for discipline grow louder as interest payments consume a larger share of budgets. Deficits are acceptable for managing recessions or funding infrastructure, but voters resist using them to finance everyday consumption.
That leaves governments facing familiar choices: cut spending, raise taxes or hope for faster growth. All these options have political implications. Monetary policy does as well, but it operates with a single objective — maintaining price stability in a growing economy — and enjoys the cover of theories of inflation.
Fiscal policy is more transparently political. Decisions about taxing, spending and borrowing are intentionally redistributive and their consequences are much harder to predict.
Making commitments credible
Then there is the question of enforcement and compliance. As long as central banks maintain their independence from political interference, they can concentrate on meeting inflation targets. Achieving them requires technical judgment whereas meeting fiscal targets requires political will.
The creation of the parliamentary budget officer in 2006 under then-prime minister Stephen Harper was an important innovation, but the PBO’s role is to produce credible forecasts, not to enforce discipline.
That leaves MPs themselves. Unfortunately for them, Canada has adopted a constitutional model that gives the executive near-total control over fiscal decisions. The House of Commons finance committee reviews hundreds of pre-budget submissions — 948 this year — but cannot compel adherence to fiscal rules. Parliament is the ultimate source of authority in fiscal matters, but the architecture of fiscal governance in Canada puts the government in charge of all key fiscal decisions. That includes the decision to create, amend, suspend or just ignore rules.
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If enforcement is so weak, why bother with rules at all? Two reasons. First, fiscal literacy is scarce among both the public and politicians. Rules provide a common language for discussing public finances and shift attention from static comparisons — such as “our debt is the lowest in the G7” — to trajectories: where we are heading, and how fast?
Second, fiscal rules reinforce the democratic value of keeping promises. Promises can be broken — and sometimes they must be — but without them, accountability evaporates. Politicians appreciate flexibility but they also value resolve. Fiscal rules make that resolve visible, not just for voters but also bureaucrats whose co-operation is required to implement spending reductions.
Establishing the right fiscal rules (and there are many possibilities) should not be a matter of executive privilege. There is no reason why the government should decide, on its own, what constitutes a sensible set of rules.
Toward an independent fiscal council
What Canada needs is not just a parliamentary budget officer projecting numbers into the distant future, but an independent fiscal council charged with designing rules, monitoring compliance and proposing options for sustainability.
Such a council — composed of legislators, economists and citizens — would not have the kind of independence enjoyed by a central bank. It could not enforce compliance. But by setting transparent standards and evaluating performance, it could help restore credibility and accountability to Canada’s fiscal governance. Fiscal rules will never replace political judgment, but they can make that judgment clearer. In an era of mounting debt and fading trust, credible commitments are not a luxury. They are the foundation of democratic accountability — and the first step toward serious fiscal responsibility.
