The Trudeau Liberals are doing everything they can to ram through the implementation of their spring budget.
The unprecedented budget brought forward last month—after a two-year delay—shows a deficit of $354.2 billion for last year and the Trudeau government’s plan to spend an additional $101.4 billion in the coming year. This budget pushes Canada’s national debt north of $1 trillion.
Despite these unprecedented levels of debt and deficits, Finance Minister Chrystia Freeland regularly touts Canada’s “strong financial position”.
The Trudeau Liberals would do well to learn a lesson from Newfoundland and Labrador.
After 14 years of unprecedented deficit spending, the government of Newfoundland and Labrador is on the verge of insolvency.
The province has the highest expenditures coupled with the highest deficits and debt per capita of any province in Canada.
Rather than save and pay down debt during the good times, they spent like there was no tomorrow.
Over a fifteen-year period, their spending rose by 80%, all as their revenues shrank and the Province’s financial situation deteriorated.
Now with a net debt of $14.4 billion (somewhere between $44-47 billion if you include public pension and crown corporation liabilities) they are in such bad financial shape that their credit has been downgraded and they can no longer sell their bonds on international markets.
Simply put, successive governments in that province spent more than they brought in in revenue creating a debt crisis.
The unfortunate situation of Newfoundland and Labrador is further proof that you cannot borrow and spend your way out of debt: Something the Trudeau Liberals would do well to pay attention to.
The plight of Newfoundland should provide some sobering lessons for governments of all levels.
1) Debt must be controlled.
2) You can’t borrow and spend your way out of debt.
3) Interest rates cannot stay historically low forever.
Even if we were to take Minister Freeland at her word, that her budget was “reasonable and sustainable”—which I do not—her optimism also fails to take into account the dire financial situations already brewing in numerous provinces prior to COVID-19.
According to the Parliamentary Budget Office, only three provinces (Quebec, Ontario and Nova Scotia) have stable fiscal outlooks. Even there, Ontario and Quebec are fast approaching 50% net debt to GDP ratio.
Even with tax increases—which would further damage the economy and hurt working families—or cuts to spending, most provinces will not be able to correct course without a large federal bailout.
But what happens when the lender is in more debt than the borrower?
It sets the stage for a financial collapse.
As veteran Journalist John Ivison pointed out this week: Trudeau and Freeland’s optimism (what some might call hubris) about their strong fiscal position justifying deficit spending sounds eerily familiar. It echoes the words spoken at the Toronto Economic Club in 2007 by, then, Newfoundland Premier Danny Williams when he proudly proclaimed that his province had “turned the fiscal corner” and that Newfoundland would soon be self-reliant and “master of our own house.”