The balanced budget era is over. Now what?

Between the tabling of the federal budget in April and the end of the parliamentary sitting in June, Conservative Erin O'Toole asked dozens of questions in the House of Commons and spoke thousands of words. Not one of those words was "deficit."

Granted, what happens in question period doesn't always reflect what actually matters most in the world. And Conservatives have not stopped worrying entirely about government spending Pierre Poilievre, in particular, has latched on to the idea that the current pace of federal spending is somehow leading to inflation.

But O'Toole is also promising only that a Conservative government would aim to balance the budget over a period of ten years a commitment that would take at least three elections to fulfil.

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This relative lack of urgency on the opposition side might speak to this peculiar moment the pandemic and its aftermath. It might also be further evidence that the balanced budget era when running a deficit was thought to be inherently bad is truly over.

So what comes next?

The balanced budget era could be said to have run from roughly 1994 to 2015, though its roots go back to the 1980s but it was in some trouble even before Justin Trudeau's Liberals came to power on an explicit promise to spend more.

On election day in 2008, Stephen Harper declared that under a Consevative government, "we'll never go back into deficit." Five weeks later, he acknowledged that deficits would be "essential" if countries were to combat the recession caused by the global financial crisis.

The Harper government ended up running an annual deficit for six consecutive years. The sky didn't fall. In fact, it was later argued that many claimed the Harper government undermined economic growth when it cut spending to return to balance as quickly as it did.

Still, it was considered wildly bold and daring when the Liberal platform in 2015 included deficits. Even the NDP at the time was insisting on balanced budgets. But then the Liberals won a majority and neither the sky nor the Trudeau government fell when the actual deficits were larger than promised.

Concern over deficits not rising: poll

The Conservatives also began to shift. Andrew Scheer initially vowed that a Conservative government led by him would balance the budget in two years. Shortly before the 2019 election, that timeline became five years.

The deficits from 2015 to 2019 now seem quaint when compared to the $354 billion deficit the federal government estimates for 2020-2021. But the sky hasn't fallen and there is relatively little debate about the need for that spending.

A recent poll by the Angus Reid Institute found that while concern about government spending exists, it has barely budged since the start of the pandemic and is still only a top-three concern for Conservative supporters.

At the same time, no major party is vowing to cast off all restraints. Even if a national government's debt never really needs to be repaid, technically, no one is claiming that deficits don't matter. The Liberal government is planning for the annual deficit to gradually decline to $30.7 billion in 2025-2026.

Proposals for "fiscal anchors" now include measuring the size of the federal debt in relation to the Canadian economy (the debt-to-GDP ratio) or the annual cost of covering the interest on that debt (debt servicing charges). Opinions vary, of course the CD Howe Institute released a "shadow budget" in April that imagined a surplus in 2025 (though it would require raising the GST by two points).

But the old goal of strenuously avoiding debt might be fading away in favour of managing debt, along with the costs and risks of carrying it.

"The [fiscal anchor of a] balanced budget told the government and Canadians when it was time to restrain spending or raise taxes. We needed that rule for accountability in government," said Michael Smart, an economist at the University of Toronto and co-director of the Finances of the Nation website.

"But a balanced budget makes no sense right now. Interest rates are low and we have real spending needs, so we should borrow. But we still need a fiscal anchor. Borrowed money is not free.

A victory for progressives

"So how do we know how much borrowing is too much? Once the pandemic is over and the economy has largely recovered, we should make sure that the net debt to GDP ratio starts to fall again. As long as that happens, we'll know we are on the right track."

No doubt, part of the political and practical value of a balanced budget policy is its simplicity underpinned by the deeply flawed idea that a government budget is analogous to a household budget. But Alex Himelfarb, a former clerk of the Privy Council, has said that when debt avoidance is coupled with political and public aversion to broad tax increases, the result is a low ceiling for policy ambitions.

In that sense, the end of the balanced budget era is a victory for progressives. The next Conservative government might find it even harder to argue that spending cuts are necessary.

On the other hand, governments that spend more could be more vulnerable to the claim that they're wasting public money. Progressives also have to remember that a future fiscal crisis linked to increased spending could lead to a new era of austerity, as it did in the mid-1990s.

Getting value for money

And while the fiscal track laid out by the Trudeau government shows a declining deficit and a debt-to-GDP ratio that falls after this year, the Liberals still haven't accounted for a possible increase in health transfers to the provinces. The federal government's finances are currently sustainable; the finances of provincial governments are not so healthy.

Pointing to the inequities and weaknesses exposed by COVID-19, Himelfarb argued in March that the balanced budget era improved Canada's "fiscal resiliency," but at the cost of "social resiliency." He also said that the debate now should be about what is and isn't a good use of borrowed money.

That could be a useful frame for the upcoming election campaign. But a greater focus on what public investment might actually accomplish is probably overdue.

"I think when we talk about debt that, instead of focusing on the numerator, we should be focusing on what are we doing to maximize the denominator, which is GDP, which makes any debt load easier to manage if you've got more money to make the payments," said Armine Yalnizyan, an Atkinson fellow on the future of workers.

"And so, consequently, you have to look at maximizing the potential of your own workforce," "We really need to introduce a new concept to our budget-making, which is, 'What are we getting for our money?'"

Something like funding for child care might be understood as a way to boost the workforce participation of parents and support the welfare and potential of children. Conversely, the Liberal government's recent decision to boost Old Age Security might be harder to justify.

At the same time, Conservatives might be happy to apply a very strict value-for-money rubric to all sorts of government spending.

Either way, the question of whether the budget was perfectly balanced would no longer be paramount.

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