The Price of Prudence

Published on December 1, 1999

The federal Department of Finance”s recent Economic and Fiscal Update provides for $28 billion a hefty 30 percent of the total $95 billion projected surplus between 2000-01 and 2004-05 – to be set aside as a cushion to guard against untoward circumstances. The main rationale for such strong prudence is to prevent the recurrence of any deficit recurring. But in the almost certain event that little or none of the $28 billion is needed for that purpose, it will be used to pay down the debt. So another (unstated) rationale is to accelerate reduction in the debt burden. This report explores alternatives that free up substantial money for new spending or tax cuts and yet still result in a significant decline in the debt-to-GDP ratio. For example, if Ottawa balanced its budget overall during the course of five years, it could devote the entire $95 billion projected surplus totalled over five years for spending and tax cuts. By 2004-05, debt as a percentage of GDP would be 2.4 percentage points higher than in the 1999 Update, but there still would be a sizable reduction in the debt burden compared to 1999-2000 of 12.8 percentage points.