Checking the Facts: Can the Federal Deficit Be Eliminated in 10 Years Without Cuts?

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The federal government has a large budget deficit – according to recent projections by the Parliamentary Budget Officer (PBO), it is on track to spend about $ 138.2 billion more than it collected this year. This compares to a deficit of $ 334.7 billion in 2020-21. The reason for these large deficits is mainly the increase in spending and other effects on the economy linked to the COVID-19 pandemic.

So, is it possible to go from the current deficit of several hundred billion to break even in a decade?

On Tuesday, Tory Leader Erin O’Toole said a government led by him would return the federal pounds to balance within 10 years – without cutting government spending aside from cutting temporary support programs linked to the pandemic.

“We will increase spending in a few key areas, like health care and wellness, while keeping it under control everywhere else,” O’Toole said. He added that his party’s fiscal policy would “responsibly cut emergency aid, grow the economy” and “limit spending growth.”

During the Liberal Party’s platform announcement on Wednesday, Prime Minister Justin Trudeau called the proposal to balance the budget without cuts “magic thinking.”

In this fact-check, CBC News asked an expert.

Liberal Leader Justin Trudeau said O’Toole’s plan was a “magical thought.” (Sean Kilpatrick / The Canadian Press)

The deficit decreases at the end of the pandemic

Trevor Tombe is Professor of Economics at the University of Calgary and Co-Director of Finances of the Nation, an online publication that presents analysis and commentary on Canadian tax policy from a non-partisan perspective.

“We shouldn’t take the deficits right now as an indication of what is normally the case,” Tombe said. “These are exceptionally high borrowing levels.”

Temporary emergency government benefits related to the pandemic, such as the Canada Response Benefit (CRP), Canada Emergency Wage Subsidy (CUS), and more, are expected to end as businesses expand. will open and life will return to normal.

The end of these programs will have major implications for the federal funds.

From a perspective PBO released near the start of the election campaign, the deficit is expected to decline to just under $ 25 billion by 2025-26.

Parliamentary Budget Officer Yves Giroux. The PBO projects that the federal deficit will decline to some $ 25 billion by 2025. (Adrian Wyld / The Canadian Press)

“It gives you a better idea of ​​how big the deficit the next government will have to think about,” Tombe said.

Although this is a projected deficit reduction of over $ 100 billion in five years, the government is still expected to be in the red by roughly $ 25 billion. What options does a government have to eliminate it, especially if cuts in government spending are not being considered?

To grow

O’Toole is not wrong to view economic growth as a plausible way to eliminate the deficit, says Tombe.

“A growing economy means higher income levels. A growing population will mean more taxpayers. So, roughly speaking, federal revenues will increase with the size of the Canadian economy, ”Tombe said.

But should annual economic growth rates be at unrealistic or unprecedented levels to break even? Tombe says they wouldn’t. He estimates that an average real gross domestic product (GDP) growth of about 1.8% per year would allow the federal government to balance the budget by 2031.

“If incomes rise, as they normally do with the economy as a whole, then by 2031 we envision federal revenues of around $ 560 billion, take it or the other, that year. “, did he declare.

“In terms of total spending, if it grows at the rate of population plus inflation, then we’re in a situation where in 2031 we have around $ 560. [billion] – just a little shy – in total spending. So that would be your point of balance. “

It can even be done without necessarily raising taxes, says Tombe.

“Pure arithmetic is pretty straightforward,” he said.

Increase in health spending

It is important to note that O’Toole is not proposing any cuts in overall federal government spending. His proposal includes increased spending on health initiatives, for example, so there will likely be cuts in other areas.

“All governments are cutting something, somewhere, and they are increasing their spending elsewhere. Absolutely every party has something that they would reverse,” Tombe said.

The PBO has yet to fully cost the Tory Party platform, so it is unclear how well their policy proposals fit into the commitment to balance the budget.

And while the Liberals have not officially committed to a similar timeline to balance the budget, Tombe says it is also not out of reach if they continue to govern.

O’Toole’s proposal echoes how one of his Conservative Party-leader predecessors, Stephen Harper, eliminated the deficit in the years following the 2008-09 financial crisis, Tombe says.

The government has recorded large deficits as part of a stimulus plan. By 2015, federal government spending, adjusted for inflation, had returned to 2008 levels and the federal books were balanced.

There is another way to balance the pounds. For example, we can look at the mid-1990s, says Tombe, when Prime Minister Jean Chrétien and Minister of Finance Paul Martin significantly reduced the amount of federal government spending to balance the budget.

Fact-check: true (excluding temporary emergency support programs related to the COVID-19 pandemic).


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