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Liberal spending plans are on pace to add $150-billion to the national debt over the next five years, according to a new analysis by TD Economics.
That amount would nearly match the $154-billion in new debt approved over six years under the Conservatives as part of its response to the 2008-09 financial crisis.
Finance Minister Bill Morneau revealed last month that the outlook for federal finances had worsened and that next year’s deficit would be $18.4-billion, before accounting for the spending promises made by the Liberals during last year’s election campaign. Mr. Morneau’s Feb. 22 announcement included a two-year forecast, and the minister promised that Canada’s ratio of debt to gross domestic product would decline during the government’s first mandate.
However, an analysis released on Tuesday by TD Economics challenges that claim. It projects that over the next five years, annual deficits are on track to stay around $30-billion and the debt-to-GDP ratio will rise.
The TD figures include the government’s $6-billion a year in contingencies. If that amount is not needed, the projected shortfall over five years would be $120-billion rather than $150-billion.
According to TD, the federal debt-to-GDP ratio, including the contingency figures, will climb from 31 per cent this year to 36.1 per cent in the 2020-21 fiscal year unless the government moves to cut spending or raise taxes.
To put the added debt in perspective, $150-billion is about half the size of the Ontario government’s net debt.
TD is among the many voices on Bay Street arguing that federal stimulus through deficit spending is warranted, but the bank economists caution that Ottawa needs to produce a clear plan for keeping the debt in check.
“We think growth is maybe a little weaker than what the government is currently including in its forecast,” Brian Depratto, an economist with TD Economics told BNN.
“The bigger issue is that it’s $30-billion for quite a while. We have revenue growth outpacing expenditure, but that gap is very narrow. So it’s going to take a very long time for that to close.”
Bay Street economists have argued in recent months that federal deficit spending is justified, but there is disagreement over whether the Liberals should provide stimulus in addition to what was promised during the election campaign.
Bank of Nova Scotia chief economist Jean-François Perrault said last week that a federal deficit of nearly $40-billion would be justified.
“A well-designed stimulus package has the potential to help the Canadian economy achieve ‘escape velocity.’ Given the challenges we face, the government should not disappoint with a timid response to the deterioration in the outlook,” he wrote in a piece published in The Globe and Mail.
That comment was challenged by Bank of Montreal chief economist Doug Porter in a recent note.
“It is simply astounding how Bay Street economists are falling over themselves, egging on the Canadian government to crank up the stimulus and let the budget deficit fly,” he said. “In the face of the structural challenges of a deep dive in commodity prices and slowing global growth, Ottawa simply cannot ‘kick-start‘ the economy on its own, nor can fiscal policy launch ‘escape velocity’ to stronger sustainable growth rates as others have suggested.”
-With files from BNN