For immediate release on Thursday, March 23, 2023
Correcting Course: Ottawa Needs a New Fiscal Approach
March 23, 2023 – The Federal Government’s fiscal framework is anything but “fair and prudent,” according to a new report by the C.D. Howe Institute, and these goals can only be achieved if the government surrenders some of its fiscal policy flexibility.
In “Ottawa Needs a New Approach to Fiscal Policy,” John Lester and Alex Laurin find a material risk that Ottawa will miss its declining debt-to-GDP ratio target over the long run. “The fiscal plan is not prudent,” affirm the authors. “It overstates the amount of fiscal consolidation that is likely to occur by the end of the forecast period, and the long-term trend decline in the debt ratio is overstated due to optimistic assumptions.”
In addition, Lester and Laurin argue that fairness to future generations requires that the government pay down the debt incurred to support incomes during COVID-19 before people who did not benefit from the spending start paying taxes.
While Canada is not unique in running deficits in good times and bad, it is only one of three OECD countries that have yet to adopt legislative constraints on fiscal policy. Four Canadian provinces -- British Columbia, Manitoba, Ontario and Quebec -- also have legislation that imposes constraints on their fiscal policy.
In most countries, fiscal rules impose operational constraints on fiscal policy. This approach has not always been successful, primarily because it is not possible to design rules that cover all eventualities. A better approach, pioneered by New Zealand, is to set out in legislation the principles of responsible fiscal policy that the government must follow and to allow the government of the day to decide how to implement these principles.
The authors recommend that the federal government enshrine in legislation two fiscal principles.
- Debt must be managed prudently, bearing in mind the issues of sustainability, stabilization of the economy, and the impact of debt on present and future generations.
- Gaps between prudent and actual or projected debt levels must be eliminated over a reasonable period of time, bearing in mind the state of the economy and the stance of monetary policy.
“Success will largely depend on buy-in from the public and political parties on the need for sustainable and fair fiscal policies,” the authors conclude. “Setting out the general guiding principles for fiscal policy and requiring an independent assessment of compliance with the principles are the key ingredients to set in motion a self-reinforcing circle of fiscally sustainable policies.”
For more information contact: John Lester, Executive Fellow at the School of Public Policy, University of Calgary, Alexandre Laurin, Director of Research at the C.D. Howe Institute and Gillian Campbell, Communications Officer, C.D. Howe Institute, 416-479-9520, gcampbell@cdhowe.org
The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada's most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.