During his year-end interview cycle, prime minister Justin Trudeau has been downplaying any kinds of risks to the economy based on the size of the deficit we have.  Andrew Scheer, meanwhile, is sounding the klaxon of economic doom albeit one that puts the Conservative record into a bit of a rosier glow than was earned.  Both leaders, however, are not being entirely honest about the situation Canada finds itself in.

To start, we should acknowledge that the economy is performing quite well, all things considered.  There was record job growth last month, and our unemployment is at its lowest level since comparable statistics started being kept in 1976.  GDP is growing around two percent annualized, and the Bank of Canada continues to say that the economy is running around capacity.  This presents challenges for Canadian industries in terms of deciding where they need to invest, whether it's in boosting capacity domestically, which would mean doing things like job training to bring more marginalized Canadians into the economy; or it could invest internationally and expand their global footprint.  It's not a bad situation to find ourselves in.  Granted, the energy sector is facing some particular challenges that are related to a particular collision of factors that created a supply-and-demand crisis, which is starting to abate and should resolve itself within a few months.

In his interview with CTV, Trudeau pointed to these job figures and economic growth to justify his government's spending.  He can point to debt-to-GDP ratio that is declining (and is among the best positions in the G7), and the fact that despite the Conservative talking points, foreign direct investment is up across the board (despite the dip in the energy sector), and yes, that Canada has a "AAA" credit rating.  However, an economist I spoke to pointed out that it's not really clear what ratings agencies are referring to these days, and their ratings are less transparent than they used to be, so for Trudeau to cite that the rating is an expression of confidence in our economy's ability to withstand future shocks is perhaps a bit fast and loose with the reality of the situation.

It's a basic economic truth that a government running deficits has less fiscal room to manoeuvre in a recession than one that has balanced budgets, no matter the fact that our deficits are currently very modest, and that our debt-to-GDP is on a steady downward trend.  And there is a risk that a government that consistently spends more than they say they will as this government has been wont to do will continue to spend in the event of a recession.  After all, it took the Conservatives quite some time to both ramp up and ramp down spending in the wake of the 2008-09 recession (to the point that the economy had already turned a corner by the time the spending actually flowed), and even when the Conservatives did start to scale back their spending, they did so in a manner that put fiscal policy out of step with monetary policy, which created its own particular stresses on the economy.

I should also point out that in his response to Trudeau's comments, Scheer was also less than genuine in some of his comments.  While he makes the actual point that a one percent drop in real GDP growth would take a $5 billion chunk of the budget, even before stimulus spending hits, he's not entirely accurate in that the current government has spent "the cupboard bare."  There is a lot of infrastructure spending that this government has backloaded, meaning that even if there is a recession in the next five years, much of that spending is already booked and will be ready to roll out.

Scheer is also being less honest in his crowing that the Conservatives paid down $37 billion in debt before the last recession that was a holdover from the previous Liberal government, and in their race to cut the GST by two points, the Conservatives actually spent through their surpluses and had reached a deficit before the recession actually hit.  If they'd kept the GST at seven percent, they would have paid off a hell of a lot more debt than that $37 billion (before adding another $150 billion to it).  His usual assertions that they left the Liberals a balanced budget and an economy in good shape also ignore the oil price recession in 2015 that took $70 billion out of the budget projections, and the fact that their "balanced" budget booked a number of false savings that were never going to be achieved.  As well, he likes to repeat the line that "the bigger our deficits today, the higher our taxes tomorrow."  That's not exactly true given that the debt-to-GDP ratio is shrinking, and meaning that there wouldn't be a corresponding tax increase to pay down debt the current tax level will do the job on its own.

I would also highlight the fact that, as justification for the spending, Trudeau's response that "when Canadians have better jobs when they have more education, when we have when we have solid infrastructure or more housing, Canadians do better.  Even if there are difficult times in the economy," he's not really pointing to an ability to recession-proof our economy.  While those things are important, recessions come in different forms and start for different reasons, so there is no real way to properly buffer the economy.  After all, a crash in oil prices and a tech bubble bursting will have very different effects on our economy.  If there were a way to figure out these impacts ahead of time, we'd be better off, but nobody has that crystal ball.

Trudeau did have the ability to demonstrate that his government was on track to a balanced budget in their fiscal update a few weeks ago, it showed that thanks to their economic growth, the deficit was on track to be down to $3 billion, which is virtually a rounding error given the scale of our economy, and yet they chose to add new spending and not actually articulate a solid reason for doing so, other than their usual pabulum.  That means that the continued $20 billion deficits keep us closer to being in a place where they're a problem if things go sideways.

Photo Credit: Jeff Burney, Loonie Politics