Bill Morneau's budget challenge: Deficits and the difficulty of planning for a long future

As I reassured a millennial colleague the other day, in 40 years most of the boomers will be dead.

It may seem like a long time to waitfor that demographic bulge to relinquish their homes or jobs, but now that the oldest boomers have reachedthe age of 71, the workplacechanging-of-the-guardis already well underway.

• Deficit has soared ahead of March 22 budget, Bill Morneau says
• Bill Morneau tries to reassure Canadians economic growth is worth a deficit

A speedily aging and shrinking workforce is one of the more certainnew variables that Canada's finance minister, BillMorneau, must toss into the mix as he imagines the future impactof the deficit he plans torun up in next month's budget. Othervariablesare not so clear.

It may be no more than a persistentillusion, but itfeels as if this time the global economy in general and Canada's in particular really areonthe precipice of greater-than-usualuncertainty.

Unexpected eventualities

While there are many changesa wise government can make to adjust for unexpected eventualities, deficits represent an enduring shackle to an unknown future. There are goodreasons why this matters.

Just like maxing out your first credit card, running a governmentdeficit is easy. Paying it off is not.

Most economists agree there is nothing wrong with carrying a federal debt of between 25 and 35 per cent of GDP, especially while interest rates are so low. But running repeated deficits larger thanthe growth rate of the economy, popular as it may be while governments are doing it, can quickly accumulate into something far less manageable.

Angry voters

According to conventional economics, governments have two options to get rid of debt. Both require a cutback in spending. One is to freezespending while waiting for the economy to outgrow the debt. Unfortunately afreeze feels like a cut, since spendingmust be reduced by the amount of the previous year's deficit.

The more urgentway to reducedebt is to take an axe to spending as we saw after the federal debt peaked in 1997 at about 65 per cent of GDP or raise taxes. As politicians have learned time and again, there is never a good time to slash spending or raise taxes. It makes voters mad.

Besides the great difficulty of unwinding a deficit once it exists, there are other reasons Morneau must be wary of how much he is willing to borrow.

One is the whole concept of a return to normal growth.

As Bank of Canada governor Stephen Poloz has reminded us repeatedly, one way of calculating growth is production per worker times the number of workers. But as the boomer cohort leaves the workforce, the number of Canadian workers is expected to shrink, alittle at first, then much faster in about five years, asmidpoint boomers, born in 1955, hit the traditionalretirement age of 65.

As we have seen in countries like Japan that have led the way on an aging workforce, normal growth rates are much lower than they were when large numbers of young families were nesting and buying things for the kids. It may be that growth rates averaging between the one and two per cent that we are currently experiencingare not so bad.

• Bill Morneau warns balanced budget could lead to recession

Morneautells us that without deficit spending, Canada mayhead intorecession. Of course that begs another question: What will the government do if a much more serious crisis arises? There are plenty of possiblechoices on the horizon.

Crisis ahead?

There are new worries about the stability of global banks as they set aside more money to cover expected bad loans. So far this week, Canadian bank results have not been up to their previous stunning standards.

• National Bank profits down 37% as lender writes off $145M Maple Bank stake
• Saudi oil minister's message for high-cost crude producers: 'get out' of market

Renewed hopes for an oil rebound were shaken yesterday as the Saudi Arabia's oil minister told Texas oil executives that his country could live with $20 US a barrel oil. He saidhe was willing to let prices stay low until high-cost producers (read Canada's oilsands producers) were driven out of production.

Even if oil prices bounce back eventually, it won't do the federal books as much good if Canada's industry has been decimated.

Oh yes, there is still the danger of an impending housing crisis, another fall in the loonieand the ever-present danger of a U.S. recession relapse. Over a long future, interest rates, now low, cannot be predicted.

It may be that we can replace the productivity of a shrinking workforce with automation and robotics, allowing a return to fourpercent growth. But unless something changes in Canada's current demographic trends,loans taken out by the government now will have to be repaid by a smaller working population.

Millennials may look forward to getting all those greatboomer homes and well-paying jobs. But unless our finance minister is prudent in his budget deficit spending, those millennialsmay also have the doubtful pleasure ofinheriting the boomers'burdensome nationaldebt.

Follow Don on Twitter@don_pittis

More analysisby Don Pittis