Liberals go from 'beer and popcorn' to 'most significant social policy innovation in a generation'
Governments that borrow will be punished at the polls if they misspend, rewarded if they're wise
Ten years after the fact, the new Liberal government's first budget is topped by something of a reckoning with the defeat of the last Liberal government.
The 2006 election was framed, in part, by a question of child care: the Liberal plan for a national child-care system versus the Conservative promise of a bit more money for every family with a child, the universal child-care benefit.
It was a neatly ideological dispute between a large public program on the one hand and the equivalent of a tax break on the other — a dispute that was infamously blown up when a Liberal strategist publicly dismissed the latter as money that would be spent on "beer and popcorn."
- Ottawa forecasts $29.4B deficit — with lots more red ink to come
- Liberals push deficit to spend big on families, cities
- Federal budget revamps child and family tax benefits
- More coverage of the 2016 federal budget
"Liberals fell into the trap of [making it a] national child-care system versus $100 per month. And they thought these are two diametrically opposed concepts," said a senior Liberal now, speaking on condition of anonymity. "And the reality is there's nothing inherently wrong with a child benefit that goes to a family every month."
The previous Liberal government, in fact, had previously embraced the notion of a monthly benefit, implementing the Canada child tax benefit and the national child benefit supplement in the 1990s. To that the Conservatives added the universal child-care benefit and then, in their final months, income-splitting for families with children plus more money for the universal benefit.
And with all that on the table, the Liberals took the opportunity to do something.
What they have now put down in the budget is the Canada child benefit, a $23-billion commitment that adds $3.4 billion to funding previously allotted for the pre-existing child benefits ($10.7 billion), the universal child-care benefit ($6.8 billion) and income-splitting ($2 billion).
What the Liberals have created is a progressive, tax-free benefit that they believe will move approximately 300,000 children above the poverty line: a measure the 2016 budget's authors hail as "the most significant social policy innovation in a generation." (All the while saying that they will work with the provinces to create more child-care spaces.)
Last year, researchers, including Kevin Milligan, a member of the Liberal party's economic advisory council, reported evidence that such benefits were well-spent by recipients.
It is the Canada child benefit that, after a significant amount of throat clearing about the challenges of today and the hopes for tomorrow, Finance Minister Bill Morneau gave top billing in his budget speech Tuesday afternoon.
And now it is merely on almost everything else that he will be challenged.
Unmentioned in Morneau's speech was the bottom-line number: $29.4 billion. That deficit for the next fiscal year is to be followed in turn by shortfalls of $29 billion, $22.8 billion, $17.7 billion and $14.3 billion.
Here be the cost of hope. And here then is the other point of demarcation: the previous Liberal government prided itself on its ability to balance the budget; the new Liberal government is proudly choosing to do the opposite. "The situation is very different than the 1990s," said that same senior Liberal recently.
On that thesis — that a struggling economy and strained middle class need help and that the federal government's relatively low debt-to-GDP ratio makes spending possible — the Liberals embraced the notion of investment last year, pledging to run deficits and winning a mandate to do so.
That thesis, carried now with the complications of governing, is set to be tested.
Getting to $29.4 billion
The price of oil only continued its slide through the fall and the decision was made in January to update the public on the fiscal situation as the government's deficit target of $10 billion fell away.
That update in February projected a deficit of at least $18.4 billion, mostly the result of the economic situation, and undercut much of the sticker shock that might have come with today's deficit figure. (Some consideration was given to including relief measures for struggling provinces in that update, but ultimately those moves were included in today's budget.)
The government's commitment to invest in infrastructure has been divided into two phases.
"The subject we deliberated longest over was did we have the time to do the big strategic infrastructure play in this budget or was the risk of wasting money too high," said another senior Liberal. "There's a decade of backlog of recapitalization projects that need to be done. Let's do those projects while we take the time we need to design the strategic infrastructure program correctly."
The first phase will include funds to modernize and rehabilitate existing infrastructure. Phase 2, described in the budget as "broader and more ambitious," will come later, with plans to be announced in the next year.
The government's pre-budget consultations convinced it to abandon a campaign promise to tax stock options.
Meanwhile, the Liberals insist they were surprised to discover that $1.7 billion promised by the Conservatives for First Nations education was not built into the fiscal framework (New Democrats say the Liberals should have known that the funding, which was contingent on legislation the previous government abandoned, was not going to be there).
Further rewriting the Conservative legacy, the Liberals are also now planning to eliminate the children's fitness and arts tax credits.
Deficits, with caveats
The government's projected deficits come with two caveats. First, each annual deficit includes a $6-billion allowance for the possibility of economic trouble. Second, the growth projected to be spurred by Liberal measures is not accounted for. So while the Liberals are no longer keeping to what they committed to during the election — those short-lived "modest" deficits of no more than $10 billion — they have also given themselves room to exceed these new expectations.
The Liberal wager would seem to be that the public will accept deficit spending so long as the government seems to be moving back toward balance. And the Liberal argument would seem to be that they are doing what they said they would do — that developments in the economy since the government came to office have only affirmed the Liberal prescription.
"I want to take us back to our objectives," Morneau told reporters this afternoon. "Canadians told us two things. They said 'help me and my family' and 'make investments for the future' … We're moving forward with our plans for the economy."
A day after his February update, Morneau challenged the alternative: warning that reducing public spending to balance the budget now would put the Canadian economy into recession. The Conservatives and New Democrats have four years to figure out a counter-argument.
Now for the questions
The Liberals are not embarking on their agenda without expert opinion on their side: the budget plan highlights the IMF and OECD's recommendations that countries with fiscal room use it to invest. But none of those authorities will be held responsible if the Canadian economy doesn't improve and the middle class isn't made more comfortable and numerous.
Here then is where things get interesting.
The government is casting forward to a low-carbon, innovative "clean growth" economy, with Waterloo, Ont., looming as another Silicon Valley. It's a lovely idea (if you're into that sort of thing). And there are three more budgets to fill it out.
But can the government spend the money wisely and effectively? Can it exercise the discipline necessary to keep its deficits from getting any larger? Can it avoid the sort of embarrassing investments that weaken public belief in the government's ability to spend prudently? Can it demonstrate enough progress by 2019 to justify re-election?
And, at whatever point, can it get back to balance without politically damaging increases to taxes or cuts to spending? (And will the other various levels of government and the global economy co-operate?)
"At the end of the day it's not the size of the deficit," said one of the Liberals, "it's what you do with it."
Implementing "the most significant social policy innovation in a generation" was the easy part.
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