First of all, I would like to thank you for this invitation.
In the most recent throne speech, the government announced its intent to develop a framework for the budgetary process through balanced budget legislation. I am going to address the aspects of such legislation that are in the brief I gave you.
If it is normal for a government to incur a deficit during recession periods so that the system will function properly, it is entirely reasonable that the budgets be balanced during periods of economic growth. In section one of the brief, I look at fiscal rules to promote the healthier public finance. The section provides examples of countries that use such rules. For example, countries like Switzerland suggest that the government's budget be balanced over an entire business cycle. Sweden goes further and proposes an average budgetary surplus over the business cycle. Other countries, like Germany and the United Kingdom, do not authorize deficits unless they are for investment purposes. In other words, a deficit may be incurred only for an investment. Countries like Poland have gone even further by enshrining in their constitution the limit for the total public debt. That may cause some problems.
In the 1980s and 1990s, Canadian provinces also had fiscal rules, some stricter than others. In Quebec, for example, the Balanced Budget Act provides that the government must maintain a balanced budget, but it allows a certain degree of flexibility to permit overruns under certain circumstances. An example would be a decrease in federal transfers.
Section two explains why it is important to return to a balanced budget. I would like to turn your attention to figure 1.
First of all, it is important to understand that the OECD data relates to all public administrations in Canada, including the federal and provincial governments. The figures show that from 1996 to 2008, Canada has had a balanced budget in 11 years out of 12, meaning that the debt-to-GDP ratio declined. In figure 1, it is the ratio in black. In 1996, the debt-to-GDP ratio was 100%, and in 2007, it dropped to 65%.
At that point, I did another simulation. I wondered what would happen in Canada if all public administrations had had deficits of 3% of the GDP during that same period. During the recession in 2008, governments would have already been in a deficit situation of 3%. It isn't some crazy example. That is roughly what France experienced: 12 consecutive years of deficit from 1996 to 2008, at about 3%.
During the economic growth period, the debt would not have really declined, but it would have stayed the same. However, when the recession hit in 2008, the debt level would have increased. In that situation, the debt-to-GDP ratio would be 126% in 2014, while in the current situation, the debt-to-GDP ratio is 85%, or lower than it was in 1996.
I will wrap up with four parameters that should be considered when drafting balanced budget legislation.
First, it is important to aim for an average budget surplus of 1% of the GDP over the business cycle. Some years don't go well and there's a recession, but it's important to aim for a budget surplus over the business cycle. That's the only way to intervene when the economy is failing without increased debt from one recession to another.
Second, the legislation must make a contingency reserve fund mandatory. The federal government manages an annual budget of $300 billion. It seems quite reasonable to establish an annual budget reserve of $5 billion. If the annual reserve fund is not needed, it can go toward the debt.
Of note, in 2008 the federal government's budget no longer had this flexibility; there was no surplus anymore. The projected surplus for 2009 was $1 billion. As a result, when the recession hit, it had reduced contingency reserves.
Third, the Balanced Budget Act must plan how unanticipated surpluses will be allocated. In the 1990s and the early 2000s, federal surpluses were systematically higher than the budgetary surpluses provided for in the budget. In such a case, it would be useful to determine immediately how the surplus should be used. Should it be applied to the debt? A lost idea from the 2006 budget was to consider allocating unplanned surpluses to the Canada pension plan and Quebec pension plan in the name of intergenerational equality.
Lastly, the legislation must take into account the state of the economy and provide for situations in which deficits are allowed when things go wrong, as well as outline the repayment terms to re-balance the budget.
Thank you very much.