Fiscal imbalance redux

One of Parliament's most important jobs is to hold the executive accountable for the nation's finances. Indeed, disputes with King Charles over taxation and spending led to the English Civil War.

One of Parliament’s most important jobs is to hold the executive accountable for the nation’s finances. Indeed, disputes with King Charles over taxation and spending led to the English Civil War and eventually to our parliamentary system of government.

So let’s look at the fiscal issues at play in this election.

First of all, the nation’s finances are in remarkably good shape. Although the latest Parliamentary Budget Officer forecast is a $1.5 billion deficit for this year, this isn’t much in the context of a $300 billion federal budget.

The gross federal debt is also low. In April, it was 31 per cent of gross domestic product, less than half the level it was in the mid-1990s. Canada’s debt also looks low compared with other countries using the International Monetary Fund’s forecasts for 2015, which evaluate government net debt for all levels of government.

Our figure under this method is less than 40 per cent of GDP this year, versus over 80 per cent for the United States, Britain and France. Even famously frugal Germany is more indebted than we are.

This is thanks to good fiscal management by all governments since Jean Chretien in the 1990s. The low federal debt allowed the feds to go into deficit during the financial crisis without leaving future generations with debt levels similar to the British, French or Americans.

It also has to be said that Canada dodged a few bullets during the financial crisis. None of our banks blew up and the resource boom cushioned many parts of the country.

The federal financial position is so good, in fact, that the main conclusions of July’s “Fiscal Sustainability” report from the PBO are that under current policies the federal debt will be totally paid off in about 35 years. In fact, it would take extra spending of about 1.4 per cent of GDP, or almost $30 billion today, just to keep the debt at its current level.

Basically, a growing economy over the coming decades will drive growing federal tax revenues. Meanwhile, most of the activities that fall to the federal government under our Constitution are not suffering huge cost pressures. Our military is small. Things like the CBC are discretionary. Reforms to programs like the Canada Pension Plan and Employment Insurance mean that these programs are on a sustainable footing.

Most Eurozone politicians probably would probably run for the Canadian Parliament if they knew how sound our finances were.

In fact, you could almost say the biggest fiscal issue in our federal election is not federal. It is the provincial and territorial fiscal situation.

The PBO fiscal scenarios look at rising health care costs and the aging of our population. This last factor has a huge impact on health costs. In 2014, there were 23 seniors for every 100 “working age” Canadians between 15 and 64 years of age. By 2034, this will have nearly doubled to 39.

The other side of federal fiscal sustainability is that the provinces are in big trouble. The main PBO scenario shows a fiscal gap of, coincidentally, about the same size of the federal surplus over coming decades.

It is the return of the “fiscal imbalance,” a term you might remember from election campaigns a decade ago. The Conservatives have fiddled with the knobs on programs like the Canada Health Transfer and Canada Social Transfer to reduce their rate of growth. For example, Paul Martin promised predictable long-term six-per cent growth in the Canada Health Transfer. The Conservatives have changed this, effective 2016, to grow at the rate of nominal GDP growth with a minimum of three per cent. This seemingly small change largely eliminates the federal government’s risk that its health transfers to provinces will grow faster than its tax revenues. This is worth billions over coming decades.

The Conservative position is essentially tough love for the provinces. If a province can’t keep health costs from growing faster than the economy, it will have to raise taxes or cut somewhere else. Conservatives would probably remind people that health is, after all, a provincial responsibility.

The NDP and Liberals, on the other hand, have taken positions that would likely see more federal money transferred to the provinces. The NDP have promised to revive the six-per-cent escalator, if finances permit. The Liberals have promised a new partnership with provinces and territories to discuss such issues. We’ll have to wait for the details in each party’s official platform to come out, but it is safe to say both opposition parties are signaling they are friendlier to increasing transfers to provinces than the Conservatives.

The opposition parties, if one of them won the election, would have fiscal room to boost transfers to provinces according to the PBO analysis. This might change if they make other big-money promises; the NDP’s multi-billion promise for $15 per day daycare falls into this category.

As you decide how to vote, there are a couple of things to look for from the parties over the next six weeks of campaigning. The first is whether they plan to boost federal spending significantly given our good fiscal situation, or whether they plan to continue to pay down debt and lower taxes.

The second is their attitude to fiscal federalism. Do you believe in a strong federal government dishing out cash to support provincial programs across the country, or a federal government that sticks to its knitting and lets the provinces deal with their burgeoning health-care costs.

If you get a chance to ask a question to one of the candidates, I suggest you ask them how their party intends to help the provinces and territories deal with rising health-care costs and an aging population over the coming decades.

Keith Halliday is a Yukon economist and author of the MacBride Museum’s Aurore of the Yukon series of historical children’s adventure novels. He won this year’s Ma Murray award for best columnist. You can follow him on Channel 9’s Yukonomist show or Twitter @hallidaykeith

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