Morneau’s Snapshot

2 minute read

In the Westminster system, the practice of preparing an annual budget of the nation’s finances is attributed to William Pitt the Younger. This prodigy, prime minister at 24, vastly reformed Britain’s chaotic public finances in the late 18th century and later led Britain through the Napoleonic wars in the early 19th. It never occurred to him that a war should stop him from presenting a budget.

But the Napoleonic and later world wars were not the COVID crisis, and our current government has not found its way to producing anything it dared to call a budget, although last week it did produce something called an “economic and fiscal snapshot”.

The history of Pitt’s reforms reminds us that a budget is as much about financial order and accountability as about taxing and spending. So it might come as a surprise that there is no legal requirement that the government present a budget each fiscal year, although Canada usually manages it. The Mackenzie King Government went nearly 16 months without a budget in 1943-44, less for the mere fact of world war than – get this – because it was awash with unexpected revenues and wasn’t sure what to do. Anyway, to get authority to spend money out of the consolidated revenue fund, the government need only present its spending estimates and receive the House’s approval for the requested allocations.

The “snapshot” earns its moniker in part by not telling us much about the future, notably how the exceptional provisions for the COVID crisis will be unwound and what comes next. It does tell us that deficit will be a whopping $343 billion and that the total national debt will reach some $1.2 trillion in 2020-21.

The government faced relatively little criticism for these numbers. Some Opposition voices have said things would be a lot better if the government hadn’t been running a deficit in the first place, but it’s a little hard to see the original deficit of $34 billion as a big factor in the actual deficit of $340 billion.

How bad is all this? Well, it’s not a straightforward question. Canada has always had public debt, and a key measure of a nation’s debt, like a household’s, is capacity to carry it. Our federal debt-to-GDP ratio will rise from 31% to 49%. Mr. Morneau would tell you this compares well to many other advanced countries – the US federal debt was over 100% of GDP long before its multi-trillion dollar COVID package, while Japan’s is well over 200%. And Morneau did point out that back in the 1990s debt service costs were 6% of GDP compared to 1% now. But national-only numbers can be misleading in federal states, as provincial debt has been climbing. And interest rates have nowhere to go but up.

Of course a sizeable portion of the deficit increase is due to declining revenues, and without fiscal support the losses would be higher – to say nothing of the human costs. But there will be a day of reckoning, and it will be a long time before all of this is behind us.