EDITORIAL — Ottawa poised to deliver budget surplus — Staying the course

Brian Mulroney may have been right about free trade, but the former prime minister of Canada has nothing to brag about when it comes to his Conservative Party’s track record in curbing government spending.

During two terms in power, the self-professed conservative spent public funds almost as liberally as one of his free-wheeling predecessors, Pierre Trudeau, the flower-powered social engineer of the late 1960s and 1970s.

While Mulroney mouthed the conservative credo of balanced budgets and fiscal restraint, his focus was elsewhere, and he simply never delivered the goods.

That honor goes to the current Liberal government headed by Prime Minister Jean Chretien in general, and Finance Minister Paul Martin in particular.

Martin’s spending restraint, coupled with much-lower-than-expected interest rates, has allowed Ottawa to improve its fiscal situation dramatically since the Mulroney era.

According to Scotiabank’s Global Economic Outlook, this year’s deficit will be close to $10 billion, or 1% of gross domestic product (GDP), which is well below estimates. Just four years ago, the shortfall was a record $42 billion (6% of GDP). Experts say an improving economy will help Ottawa deliver its first budget surplus since 1969.

In reality, as Scotiabank points out, Ottawa is already off the borrowing treadmill. More than $10 billion annually is being generated from government employee pension funds, asset sales and other internal sources. As a result, net federal market borrowings have virtually disappeared over the past year.

Indeed, the government soon is expected to be a net supplier of funds to domestic markets, reinforcing negative interest rate spreads off New York and bolstering the Canadian dollar.

While all this is welcome news, Canadians need to be reminded that it is much too soon to celebrate and rev up spending. Canada may be a leader in deficit reduction among Western industrialized nations, but it still has one of the highest public debt/GDP ratios among the G7 industrial nations. Until that debt is substantially reduced, the country will remain vulnerable to unexpected turbulence in financial markets.

In the years ahead, Ottawa will come under increased pressure from special interest groups, which will argue that the government should increase spending in order to “stimulate” the economy. Ottawa ought to resist the temptation and, instead, should stay the course and continue turning in budget surpluses. After all, it would take more than a decade of annual surpluses in the order of $10 billion to reduce the federal debt/GDP ratio to its post-war average of 40% — a level last seen in 1982.

Also, Canadians know full well that Ottawa’s performance has an element of smoke-and-mirrors in that it has shifted some of its spending burden to the provinces. Only five of Canada’s 10 provinces have balanced budgets or surpluses; most still carry sizable levels of debt — which means the battles to balance budgets must now be fought on more than one front.

As every military general knows, it is counter-productive to go into battle without public support. Fortunately, federal and provincial governments are finding that most Canadians understand the need to cut spending and balance the books. It is a safe bet that, once the long-term benefits are explained, the public will support debt reduction tomorrow as much as they support deficit reduction today.