The pandemic is changing how we talk about deficits maybe for the better

Various observers and unnamed officials spent last week worrying aloud about how large a deficit the Liberal government might be preparing to run and then the new leader of the Conservative Party more or less disavowed any interest in balancing the budget.

"Economic growth is as important as controlling spending," Erin O'Toole told the Globe and Mail, adding that his goal would be to see the budget balanced over a "decade or so."

The Conservative leader in 2020 sounds like Justin Trudeau did in 2015,when the rookieLiberal leader broke with Canadian political orthodoxy and said that a government led by himwould run a series of annual deficits to fund new spending. Take it asanother sign of how completely thepandemic has upended the world.

But it also couldsuggest that this conversation now needs to focus as much onwhat agovernmentspendsborrowed money on as it does onhow much borrowed money it plans to spend.

Deficit deadlinesgetting further off

When Andrew Scheer was seeking the Conservative leadership in 2017, he vowed a government led by him would balance the budget in two years if it came to power after the 2019 election. By the timethat election rolled around, Scheer had changed his targetto five years.

Depending onhow hedefines "a decadeor so," O'Toole could be casting so far into the future that he would need to win three elections to fulfilhis promised return to balance.

O'Toole is no doubt keen to take the politically dangerous question of budget cuts off the table or at least to shrink thereduction inspending he might have to explain in the next campaign after accounting for any promises to cut taxes. The Conservatives likelywillstill spend more time talking about the need for restraint. They might also try to plead that the pandemic, coupled witha lack of discipline on theLiberal government's part, has created a situation that will take a decade to resolve.

When 'how much' matters less than'why'

But the implicit message is that balancing the budget is not the be-all and end-all of credible governance. And that clashes directly with what the Conservatives have said about the Trudeau government over the past five years.

Worries about the size of the deficit and the shape of the fiscal track are not entirely unwarranted. The actual details of the Liberal plan haven't been settled yet buteven if the last six months have stretched our imaginations as to how large a federaldeficit can be,there are probablystill broad constraints on how much a government can credibly spend. The Trudeau government will need to mind the opinions of bond markets, rating agencies and voters. Debt carries risk and debt-servicing charges couldbecome a concern again.

The Liberals might not want to be tied down by a "fiscal anchor" right now but they might not be able to get away with casting off allshackles,either. They might need to show, for instance, that the deficit and the debt-to-GDP ratio will decline in the years ahead. They alsocould aim to keep their short-term spending in line with what other G7 countries are doing.

Watch: The Trudeau government's pandemic spending plans

Trudeau government's pandemic spending plans | Sunday Scrum

4 years ago

Duration 9:18

Prime Minister Justin Trudeau will lay out a vision for a major overhaul of the Canadian economy when he delivers the Speech from the Throne on Sept. 23. The Liberals have signalled that their plan will involve even more deficit spending in order to respond to the challenges posed by the coronavirus pandemic.

A growth agenda

But the Liberal government'schoiceof targets fordeficit spending will also matter perhaps just as much as the total deficit itself.

"I think composition is a big issue," said Rebekah Young, director of fiscal and provincial economics with Scotiabank.Permanent new social spending that is unlikely to increase economic growth might worry rating agencies, she said, while an overhaul of business investment incentives might be looked on favourably.

"If we are going to be investing more, it should be in stuff that's actually going to strengthen growth [over the next] two to three years," Young said. "There is a window to make these bigger investments, but I think the risk is that they announce more on the expenditure side that is ongoing and on the revenue side we don't have a way to pay for it and it does become a structural imbalance."

The pursuit of growth can involve new social spending. Increased funding for child care, for example, could boost economic growth by making it easier for more parents particularly women to work.

'Quality' over quantity

In an article posted online this past weekend, Mike Moffatt, an economist at the Smart Prosperity Institute and a professor at the Ivey Business School, expanded onthis notion of what would constitute worthwhiledeficit spending. Moffatt argued that any new deficit spending should focus on one of five long-term challenges facing Canada: fightingclimate change, dealing with an aging population, increasing economic growth and productivity, removing barriers to participation in the economyand making housingmore affordable.

"When it comes to taking on more debt (or reducing debt), I believe we should focus on the quality of the expenditure rather than the quantity of existing debt," Moffatt explained.

Speaking to CBC Radio's The Current this week, O'Toolestruck asimilar note.

"We have to make sure that, if we're basically indebting our children, we're doing it for strategic, smart reasons," O'Toole said neatly tying together the Conservative Party's pre-pandemic emphasis on frugality and its post-pandemic turn toward investment.

"If it's about getting people back to work, [if] it's about helping the vulnerable, reinforcing some long-term care homes, working with our provincial partners to prepare for a second wave, that's great."

This is not how federal budgets typically arediscussed. In recent times,the existence of deficits and their relative sizeshave been the primary focus of opposition criticism and political commentary.The question of what that money gets spent on tends to come a distant second, except when some misuse of funds is discovered.

The question of whether the budget is in surplus or deficit will never be irrelevant. But the deficithas tended to siphon attention away fromlarger and more interesting questions about how public funds are directed and used.

If there is some general agreement in 2020 that there is no strict need to rush back to a balanced budget and if the Liberals can keep their own proposed spending within some vaguely acceptable range then the recovery might be now framed by a much better debate about what a post-pandemic economy ought to look like,and how the federal government could make it possible.