On March 4, Finance Minister Jim Flaherty brought down Budget 2010, in which Ottawa announced the largest deficit on record ($53.8 billion) for this fiscal year and five more years of deficit spending — and that’s only if everything in the economy rebounds as predicted by the consensus of outside forecasters.
Yet, investors yawned. The Canadian dollar edged a bit closer to parity with the US greenback. And other than the opposition leaders (who are required to be outraged by any government budget), no one seemed too upset. On balance, reaction was actually quite good.
How can this be? Was it in fact a “good” budget?
Budgets are political documents, not economic ones. The budget is a chance for the government of the day to set out its course for managing taxes and spending over the coming years. They present it to the electorate, put their spin on how great it is, and hope that the opposition parties will swallow it (especially in a minority Parliament as we have now). In this respect, as a political document, the budget was perfectly acceptable.
No one is pleased with the $53 billion deficit, least of all Stephen Harper. But no one is surprised by it, either, and that is probably why market reaction was so muted. These days, governments are much more forthcoming about information on budgets prior to their release than they were in previous eras. In the weeks and months leading up to the March 4 budget, the federal government has gradually released information to the markets to gauge reaction. So by the time the budget is released, nothing comes as a surprise. That is probably for the best.
But markets also had no negative, and perhaps a somewhat positive, reaction to the budget because Canada remains the global example of fiscal management. The $53 billion deficit isn’t great, but it amounts to only 3.5 percent of our national GDP.
Our debt-to-GDP ratio — which is really the best and most appropriate way to gauge if the debt is sustainable — is expected to peak at 35.4 percent in the coming year, and fall to 31.9 percent by 2014/15. That is only slightly more than the low of 28 percent or so that it touched in 2008. And it’s far lower than Canada’s debt-to-GDP ratio of 70 percent in the early 1990s.
Comparisons with international neighbours are even more telling. The US deficit, this year alone, is expected to be close to 11 percent of that country’s GDP, and the total debt-to-GDP ratio will be cresting at close to 100 percent within a few years. Ditto that of the United Kingdom. Greece’s ratio is already 120 percent, and Japan’s is close to 200 percent. Even with the $53 billion deficit this year, Canada remains in the best shape of the G7 countries.
The budget was also commendable in that it fulfills the commitments made last year around stimulus spending — and also made it clear when that spending would end. Another $19 billion will be shelled out in infrastructure spending, jobs training, and support to industries in year two of what the government calls “Canada’s Economic Action Plan.” Reasonable people could argue the merits of such stimulus spending in the first place, but the fact is the government announced it last year, committed to it, and is following through exactly as planned. No surprises here, and that is good.
As for spending restraint in the coming years, that will be the test of time. The budget outlines $2.5 billion in cuts to the military (which probably would have happened anyway given the 2011 timeline to exit Afghanistan), and also salary freezes for MPs and federal public employees (always a politically popular move). Other than this, though, we are left wondering where more cuts may come over the next five years if economic growth and rising revenues alone do not erase the deficit.
Overall, to ask if it was a “good” budget is perhaps the wrong way to phrase it. No one likes a $53 billion deficit and five more years of red ink. But given the fragile economy and the reality of how Canadians have come to depend on government services, it was acceptable.
And hey, at least we’re not Greece (or the US, or the UK, or Japan….).