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From: William B.P. Robson

To: The Honourable Bill Morneau, Minister of Finance

Date: November 22, 2018

Re: That Rainy Day You Should Be Saving For? It’s Getting Closer


We all know the economic formula: governments should moderate the business cycle by running deficits in slumps and surpluses in booms. And we all know the political reality: governments embrace the deficit part, but often shun the part about surpluses.

When times are good, revenue is abundant, and pressures for spending to alleviate distress are low, who gets fussed over a bit of red ink? Then the slump comes, revenue craters, income supports and bailouts rise – and amid ballooning debt and interest payments, we look back ruefully, asking why governments didn’t prepare better for the rainy day before it came.

Canada is on course to provide yet another sad example. Our economy has been running at or above capacity since the spring of 2017. The unemployment rate has never been lower, inflation is above the Bank of Canada’s 2-percent target, and interest rates are rising. Your fall update shows federal revenue growing almost 5 percent in this fiscal year, well ahead of the pace your budget projected last spring. But spending also growing ahead of projections wipes out any benefit to the bottom line. The federal government will still run more than $18 billion in the red, adding to a debt now surpassing $680 billion.

Why fuss over a bit more red ink when times are good? Because times are not always good. The ifo Institute at the University of Munich asks more than 1,200 experts in almost 120 countries about their assessments of current economic conditions and about their future expectations each quarter. Mapping the two responses against each other produces a “clock” of the world economy’s moves through upswings, booms, downswings and recessions. It documents the boom and bust of 2007-2009, the fitful recovery afterwards, and the world’s robust performance in the last two years. The ifo survey for the fourth quarter of 2018 suggests that the current cycle hit its peak earlier this year, and a period of weakness lies ahead (see Figure).

As the world goes, so goes Canada. Strength abroad means buoyant demand and healthy prices for our products. Weakness abroad means sagging demand and low prices. The sun has been shining on us; now there are clouds ahead.

Your government has held out the federal debt-to-GDP ratio as a benchmark of fiscal prudence. But a stable debt ratio is no great accomplishment when the economy is on a tear. When GDP slumps and both sides of the budget are under pressures that will push the debt up, observers of your fiscal stewardship to date might reasonably predict that you will abandon that benchmark, and double down on the supposed virtues of chronic borrowing.

Gloomy admonitions about saving for a rainy day may grate on a government that adopted deficits as a signature policy – a government bent on signaling virtue to enthusiasts of high spending and encouraged by polls that show most Canadians do not see government borrowing as a major problem. But finance ministers have a key role to play, reminding their cabinet colleagues, and Canadians in general, that we have obligations beyond satisfying the political whims of the moment – that we also need to do the things that future Canadians will wish we had done.

In other words, even as other politicians and advisors urge governments to embrace deficits, but forget about surpluses, finance ministers should remember the entire formula. If the federal government wants the fiscal flexibility to run deficits to cushion the next downturn, it should run surpluses first. A rainy day will come – indeed, is possibly already on the way. Your job is to prepare us for it before it comes.


William B.P. Robson is the President and CEO of the C.D. Howe Institute, and a member of the ifo World Economic Survey expert group.

To send a comment or leave feedback, email us at blog@cdhowe.org.

The views expressed here are those of the author. The C.D. Howe Institute does not take corporate positions on policy matters.