菲沙研究所-加拿大三種替代財政錨的評估（英）-2022-41正式版

ContentsExecutiveSummary?/?iIntroduction?/?1TheModelandDebtDynamicsintheBaseCase?/?4AnalysisofAlternativeFiscalAnchors?/?8RankingtheFiscalAnchors?/?17Conclusions?/?20Appendix1:TheEquationsoftheModel?/?21Appendix2:EconometricModeloftheEffectsofGovernmentSpendingandTaxationonEconomicGrowth?/?23References?/?27Abouttheauthors?/?30Acknowledgments?/?31Publishinginformation?/?32SupportingtheFraserInstitute?/?33Purpose,funding,andindependence?/?33AbouttheFraserInstitute?/?34EditorialAdvisoryBoard?/?35?/?vvi?/?ExecutiveSummaryThecurrentandprojectedfiscalpoliciesofCanadiangovernmentsasawholeareunsustainable,withthenetdebttoGDPratiosteadilyincreasingto131percentin2050inourbasecaseprojection.Whilethereisuncer-taintyaboutfuturetrendsinthekeyfiscalvariables,suchasthegrowthrateofhealthcarespending,Canadiangovernmentsshouldbegintoadoptfiscalanchorsorrulestopreventanincreasingdebt-to-GDPratioovertime.Adoptingfiscalrulesthatcontainaclearcommitmenttosustainablefiscalpolicieswillhelpreducetheeconomicuncertaintythatadverselyaffectsprivatesectorsavingsandinvestmentdecisions,thebiastowardsdeficitsfinancingpublicexpenditures,andtheadoptionofpro-cyclicalfiscalpoliciesthatcanexacerbatetheeconomicfluctuations.Skepticismabouttheusefulnessofgovernmentsadoptingfiscalrulesiswarrantedbe-causeinthepastthefederalandprovincialgovernmentshaveabandonedsuchruleswhentheybecamebindingorimposeddifficultfiscalchoices.However,studiesbytheIMFhaveshownthatgovernmentsthathaveadopt-edfiscalruleshavestrongerfiscalpositionsandmorestablefiscalpolicies.Inthispaper,weevaluatethreefiscalanchorsthatCanadiangov-ernmentscouldadopt—adebtreductiontarget,aceilingontheratioofinterestpaymentstorevenues,andabalancedbudgetrule—balancingtheprimarybudgeteitherthroughexpenditurerestraintortaxincreases.Wesimulatetheadoptionofthesefiscalanchorsusinganeconomicmodelinwhichgovernments’fiscalpoliciesaffectthegrowthrateoftheecon-omyandtherealinterestrateonpublicdebt.Eachscenariohasdifferentimplicationsforgovernmentdebtratios,economicgrowthrates,andrealinterestratesongovernmentdebtfrom2025to2050.Werankthesealternativefiscalanchorsbasedontheirpotentialforprovidingbothpublicandprivategoodsandservicesandincometransfersoverthe25-yeartimehorizonofthemodels.Wefindthatachievingandthenmaintainingaprimarybudgetbalancethroughexpenditurerestraintisthebestfiscalanchorbecauseitwouldallowforbothmoreprivateconsumptionandhigherpublicexpendituresinpresentvaluetermsthananyoftheotherfiscalanchors.Similarly,thedebttargetanchorwouldbepreferredtoaceilingontheratioofinterestpaymentstorevenues,whichinturnwouldbepreferredtobalancingtheprimarybudgetthrough?/?iii?/?AnEvaluationofThreeAlternativeFiscalAnchorsforCanadaincreases.Whilethisrankingofthefiscalanchorsisbasedonthepar-ticularscenarioswehaveinvestigated,wefeelthatitwouldberobusttoalternativestrategiesforimplementingthesefiscalrules.Werecognizethatmaintainingaprimarybalanceraisesimportantimplementationissues.Strictadherencetoazeroprimarybalancecouldleadtoabruptandwastefulincreasesinprogramspendingduringaneco-nomicboomwhenthereisasurgeingovernmentrevenues,orabruptandharmfulcutsincurrentandcapitalspendingwithadownturnintheecon-omyandadeclineintaxrevenues.Toavoidpro-cyclespendingthatwouldcontributetomacroeconomicfluctuations,governmentscanadoptarulethatplacesaceilingonthegrowthrateoftheirexpenditures.Therangeofexpenditurestobecoveredbytheceilingshouldbebroad,coveringthosecurrentandcapitalexpendituresthatthegovernmentcancontrolinthemediumterm,butnotincludeexpendituresthathaveacyclicalcompo-nent,suchasunemploymentinsuranceorsocialassistancepayments.Ourmainresult—thatfiscalconsolidationbasedonexpenditurere-straintprovidesbettereconomicoutcomesthanpoliciesthatrelyonhigh-ertaxes—isconsistentwiththeconclusionreachedbyAlesina,Favero,andGiavazziintheirpioneeringstudy,Austerity:WhenItWorksandWhenItDoesn’t,of200episodesoffiscalausterityin16OECDcountriesfromthe1970sto2014.Theyconcludedthat“onaverage,expenditure-basedadjust-mentshaveconsistentlymuchlowercoststhantax-basedones…”ThisisalessonthatCanadiangovernmentsshouldheedwhentheyconsiderthefiscalpoliciesthatarerequiredtoputCanada’spublicfinancesonasus-tainablepathintheaftermathoftheCOVID-191.IntroductionCountriesaroundtheworldincurredunprecedentedfiscaldeficitsinresponsetothepandemic.Withtheresultingincreaseinpublicsectordebts,governments,internationalfinancialinstitutions,andthinktankshavestartedtoconsidernewfiscalanchorsorrulesthatshouldguidegovernments’fiscalpoliciesinthefuture.Tobeeffective,afiscalanchormustconstrainagovernment’sfiscalchoicesaffectingdebt,deficits,expenditures,orinterestpayments.Aclearcommitmenttosustainablefuturefiscalpolicieshelpsreducetheeconomicuncertaintythatadverselyaffectsprivatesectorsavingsandinvestmentdecisions.Itmayalsoreducethebiastowardsfinancingpublicexpendituresthroughdeficits,whichcanthreatenthelong-termsustainabilityofagovernment’sfinances,ortheadoptionofpro-cyclicalfiscalpoliciesthatcanexacerbatetheeconomicfluctuations.Insomejurisdictions,afiscalrulemayhelptolimitaper-ceivedpoliticalbiastoexcessivespendingandtaxation.AccordingtotheIMF,fiscalrulesshould(a)promotelong-termfiscalsustainability;(b)helpstabilizeeconomicactivitybyrestrictingpro-cyclicalfiscalpolicies;(c)applytofiscalvariablesthatareunderthecontrolofthefiscalauthority;(d)provideagovernmentwithreasonableoptionsforaddressingthefiscalsituationwhentheruleisbinding;and,betransparentsothattheycanbeunderstoodbythepublic,arenotsubjecttomanipulationorcreativeaccounting,arecoherent,andareap-pliedtobroadcomponentsofthebudget.1Aboveall,Eyraudetal.(2018b:4)stressthatfiscalrulesshouldbesimple,flexible,andenforceable.Themostcommonfiscalanchoristheratioofagovernment’sdebttotherelevantjurisdiction’sannualGrossDomesticProduct(GDP).Over70countrieshaveadoptedaceilingonpublicdebtaspartoftheirfiscalrules.TheEUhasrecentlyrevisedandmademoreflexibleitsfiscalrulesforitsmembercountriesnowthatallofthemajoreconomieshavedebt-to-GDPlevelsinexcessofthe60percentlimitthatwasestablishedintheGrowthandStabilityPactin1997(Blanchardetal.,2021;EuropeanCommission,2022).InCanada,priortothepandemic,thefederalgovernmenthadadoptedafiscalanchorofmaintainingadebt-to-GDPratioofcloseto30SeeDahlby(2021)ontheselectionoffiscalrulesinA?/?12?/?AnEvaluationofThreeAlternativeFiscalAnchorsforCanadapercent(Canada,DepartmentofFinance,2019:ChartA1.11).Currently,thefederalgovernmentisonlycommittedtoreducingthedebt-to-GDPratio(DepartmentofFinance,2022,p.58).Alberta’sgovernmenthassetagoalofkeepingitsnetdebt-to-GDPratiobelow30percent.Skepticismabouttheusefulnessofgovernmentsadoptingfiscalrulesiswarrantedbecausethefederalandprovincialgovernmentshaveaban-donedsuchruleswhentheybecamebindingorimposeddifficultfiscalchoices.2However,studiesbytheIMFhaveshownthatfiscalrulescanwork.3Initsoverallassessmentoftheefficacyoffiscalanchors,Eyraudetal.(2018b)concludedthatfiscalrulesare“correlatedwithstrongerfiscalpositionsandmorestabilizingpolicies”(p.12)andthat“eventhoughfiscalrulesarenotapanacea,theycanmakeadentintothedeficitbiasdepend-ingoncountrycircumstancesanddesignfeatures”(p.16).Inthispaper,weevaluatethreefiscalanchorsthatCanadiangovern-mentscouldadopt—adebtreductiontarget,aceilingontheratioofinter-estpaymentstorevenues(akaDodge’sRule),andabalancedbudgetrule—usingamodelinwhichgovernments’fiscalpoliciesaffectthegrowthrateoftheeconomyandtherealinterestrateonpublicdebt.WerunthemodelforabasecasescenarioinwhichCanadiangovernments’fiscalpoliciesareunsustainablebecauseofanever-increasinggovernmentdebt-to-GDPratio.Wethenexaminescenariosinwhicheachofthesefiscalanchorswouldbeimplementedtoachieveasustainablefiscalpolicy.Eachofthesefiscalanchorsresultsinadifferentpathfortaxrates,publicexpenditures,governmentdebtratios,andeconomicgrowthratesoverthe25-yearper-iodprojectedbyourmodel.Torankthefiscalanchors,wecomparetheirprojectedpublicexpendituresandhouseholdconsumptionspendinglevelsoverthis25-yeartimehorizon.Onthisbasis,weconcludethatbalancingtheprimarybudgetthroughexpenditurerestraintisthepreferredfiscalanchorbecauseitwouldallowformoreprivateconsumptionandhigherpublicexpenditures,inpresentvalueterms,thantheotheranchors.Simi-larly,thedebttargetanchorwouldbepreferredtoDodge’sRuleofkeepingtheratioofinterestpaymentstorevenuesbelow10percent,whichinturnwouldbepreferredtobalancingtheprimarybudgetthroughtaxincreases.Thepaperisorganizedasfollows.Section2providesanoverviewofthestructureofthemodelandasimulationofthekeyfiscalandeconomicvariablesinthebasecase.(Appendix1containsthemodel’sequations.Ap-pendix2describesoureconometricmodeloftheimpactoffiscalvariablesForexample,theAlbertagovernmenthasadoptedandthenabandonedsevendifferentsetsoffiscalrulessince1992.SeeSimpsonandWesley(2012)andTapp(2013)ontheimpactoffiscalrulesinCAnEvaluationofThreeAlternativeFiscalAnchorsforCanada?/?3oneconomicgrowthinCanada,whichisthesourceofthekeyparametervaluesourmodeluses.)InSection3,wedemonstratehoweachofthesefiscalanchorscouldbeimplementedandtheirimpactsondebtratios,eco-nomicgrowthrates,andrealinterestrates.Section4discussesourrank-ingofthefiscalanchors,andSection5summarizesourTheModelandDebtDynamicsintheBaseCaseWebeginwithabriefdescriptionofthemodelthatweusetoevaluatethefiscalanchors.(SeeAppendix1forthemodel’sequations.)Theinitialvaluesofthefiscalvariablesinthemodelarebasedonthevaluesforthefederal,provincial,territorial,andlocal(FPTL)governmentsectorinCanadacirca2019.ItisimportanttonotethattheFPTLsectordoesnotincludetheCanadaPensionPlan(CPP),theQuebecPensionPlan(QPP),andothersocialsecurityfundsthatareincludedintheIMF’sdefinitionof“generalgovernment.”WeexcludetheCPPandQPPbecauseanyfiscalanchorsadoptedbyCanadiangovernmentswillgenerallynotapplyto,orincorporatethefinancesof,theCPPandQPP,whosefiscalparametersarebasedonmaintainingthelong-runviabilityofthepublicpensionsystems.WealsofocusontheaggregateFPTL,ratherthanthefiscalvariablesforthefederalgovernmentoraparticularprovinceorterritory,becausewebelievethatitisimportanttoconsidertheoverallviabilityofpublicsectorfinancesinCanadaratherthanfocusingonanyoneofthe14governmentsonitsown.Weusethemodeltoprojectthegrowthrateoftheeconomy,therealinterestrateongovernmentdebt,andthedebtratiooftheFPTLsectorfrom2025to2050.4FourbehaviouralparametersinthemodeldeterminetheimpactofchangesincurrentandcapitalexpendituresbygovernmentsandtaxratesonthegrowthrateoftheCanadianeconomy.Theseparam-eterestimatesarebasedontheeconometricmodelofthedeterminantsofeconomicgrowthinCanadadescribedinAppendix2.Themodelhasthestandardpropertyofaneo-classicalgrowthmodelinthatfiscalpolicyshocksaffectthegrowthrateoftheeconomyintheshorttomediumterm,buttheeconomyeventuallyreturnstoitslong-termpotentialgrowthrate.Theeconometricmodelindicatesthatadebt-financedincreaseingovern-SeeDahlby,Ferede,andFuss(2022)foranoverviewoftrendsinCanadianeconomicgrowthrates,realinterestrates,primarybudgetbalances,andgovernmentdebt-to-GDPratios.4?/?AnEvaluationofThreeAlternativeFiscalAnchorsforCanada?/?5mentconsumptionspendingreducesthegrowthrateoftheeconomy,whileanincreaseincapitalspendingincreasesthegrowthrateintheshorttomediumterm.Similarly,anincreaseintaxrateslowersthegrowthrateoftheeconomyintheshorttomediumterm.Anotherkeyparameterinthemodelistherelationshipbetweenthegovernmentdebtratioandtherealinterestrateongovernmentdebt.Anumberofeconometricstudies,whicharereviewedbyDahlby,Ferede,andFuss(2022),indicatethattheinterestrateongovernmentdebtin-creasesasthegovernmentdebt-to-GDPratioincreases.Consistentwiththisliterature,inourmodeltheinterestrateongovernmentdebtincreasesbythreebasispointsforaonepercentagepointincreaseintheFPTLdebt-to-GDPratio.Inthebasecasescenario,governmentconsumptionexpendituresareinitially22.0percent,governmentcapitalexpendituresare5.0per-cent,andtransferstopersonsandbusinessesare10percentofGDP.Taxrevenuesare30percentandotherrevenuesare5.0percentofGDP.Thismeansthat,initially,thereisaprimarybudgetdeficitof2.0percentofGDP,orapproximately$1,450percapitain2025.Governmentcurrentex-pendituresongoodsandservicesandcapitalexpendituresareassumedtoincreasefrom2025to2050accordingtotheprojectionsinthePBO(2021)fiscalsustainabilityreport.Initiallytheinterestrateongovernmentdebtisabout3.0percentandtheinflationrateis2.0percent,implyingarealinterestrateongovernmentdebtofapproximately1.0percent.Theinitialnetdebt-to-GDPratiois70percentfortheFPTLsector,andtheratioofinterestpaymentsonnetdebttorevenueis6percent.Itisassumedthatlong-runannualgrowthrateofrealGDPis1.8percent,whichwastheaverageprivatesectorforecastpriortothe2020pandemic(Canada,De-partmentofFinance,2019:TableA1.1).Thus,thedifferentialbetweentherealinterestrateongovernmentdebtandthegrowthrateoftheeconomy,whichdeterminestheprimaryfiscalbalancethatisrequiredtostabilizethedebtratio,is-0.82percent.Figure1showsthetrajectoriesofthedebt-to-GDPratio,theeco-nomicgrowthrate,therealinterestrateongovernmentdebt,theratioofinterestpaymentstorevenues,andtheprimarybudgetbalanceoverthe25-yearperiodinourbasecasescenario.Programexpendituresincreasefrom37.0percentofGDPto37.9percent,basedontheprojectedincreas-esinexpendituresinthePBO(2021)fiscalsustainabilityreport.Withtheincreaseindeficit-financedgovernmentexpenditures,theannualgrowthrateoftheCanadianeconomydeclinesfrom1.80percentto1.74percentfrom2033to2046beforeslightlyrecoveringto1.76by2050.Governmentrevenueisfixedat35.0percentofGDP,andtheprimarydeficitincreasesfrom2.0percentto2.9percentofGDP.Asaresult,thedebt-to-GDP6?/?AnEvaluationofThreeAlternativeFiscalAnchorsforCanadaFigure1:BaseCaseFiscalandEconomicTrends1A:BaselineofNetDebt-to-GDPofFPTLSector,2025to2050140ofGDP120100Percent806040200

1B:BaselineRealInterestRateandEconomicGrowthinCanada,2025to20503.0RealInterestRate2.5GrowthRatePercent2.01.51.00.50.01C:BaselinePrimaryBudgetBalanceofFPTLSector,2025to2050-1.8ofGDP-2.0-2.2Percent-2.4-2.6-2.8-3.0

1D:BaselineRatioofInterestPaymentstoRevenueforFPTLSector,2025to205020181614Percent121086420Sources:PBO(2021);calculationsbyAnEvaluationofThreeAlternativeFiscalAnchorsforCanada?/?7increasesfrom70percentto131percent.Withtheincreaseinthedebt-to-GDPratio,therealinterestrateongovernmentdebtincreasesfrom0.98percentto2.7percent.Asaresult,thegapbetweentheeconomicgrowthrateandtheinterestratedeclines,andafter2040theinterestrateongovernmentdebtexceedsthegrowthrateoftheeconomy,whichalsocontributestotherapidincreaseinthedebt-to-GDPratio.Finally,theratioofinterestpaymentstogovernmentrevenuesincreasesbecauseofhigherinterestratesandhigherdebt-to-GDPratiosandexceeds10percentafter2039.ThefiscalpolicyoftheFPTLsectorisunsustainableinthebasecasescenariobecausethedebtratioisconstantlyincreasing.Thisconclu-sionisconsistentwiththeresultsofthePBO(2021)fiscalsustainabilityreportandalsowithLaurinandDrummond’s(2021)projectionsoftheincreaseinfederalandprovincialgovernments’netdebt.5Whilethereisuncertaintyaboutfuturetrendsinthekeyfiscalvariables,ourbasecasescenariomeansthatCanadiangovernmentsneedtoadoptnewfiscalpoli-ciestopreventanincreasingdebt-to-GDPratioovertime.Inthefollowingsection,weconsiderthreealternativefiscalanchorsdesignedtopreventexplosivegrowthinthepublicdebt.SeealsoTombe(2022)forafiscalsustainabilitysimulationtoolontheFinancesoftheNationwebsite.TheParliamentaryBudgetOfficer’s2022reportcontainsamoreoptimisticfiscaloutlookthanits2021reportbasedonrecentbudgetplanswhichhaveimproved“themedium-termoutlookforprovincialandterritorialgovernmentown-sourcerevenues”PBO(2022:5).Wefeelthatamoresanguinelong-termfiscaloutlookisnotjustifiedbasedononeyearofmoreoptimisticrevenueprojectionsandcontinuetousethePBO’s2021expenditureprojectionsfrom2025to2050inourscenarioswhereAnalysisofAlternativeFiscalAnchorsThreecommonlyproposedfiscalanchorsinthepublicfinanceliteratureare(1)atargetdebt-to-GDPratio,(2)adebtpayment-to-revenueratio,and(3)abalancedbudget.Afourthfiscalanchor,agovernmentprogramexpendituregrowthraterule,canbeusedinconjunctionwiththeotherrules.Inthissection,wedemonstratehoweachofthesefiscalanchorscouldbeimplementedandtheirimpactsonthedebt-to-GDPratio,eco-nomicgrowthrates,andrealinterestratesbasedonthemodeldescribedintheprevioussection.Atargetdebt-to-GDPratioPriortothepandemic,thefederalgovernmenthadeffectivelyadoptedafiscalanchorofmaintainingadebt-to-GDPratioofcloseto30percent.Inresponsetothepandemic-relateddeficits,someeconomists,suchasLester(2021)andRobsonetal.(2022),haveadvocatedfiscalpoliciesthatwouldreturnthefederalnetdebt-to-GDPratiotopre-pandemiclevels.Inthissection,weinvestigatetheimpactofadoptingadebttargetasafiscalanchor.Fourpolicychoicesneedtobemadeinselectingareduc-tioninthedebtratioasafiscalanchor.Oneisthetargetratio.Asnoted,intheinitialequilibrium,theFPTLnetdebt-to-GDPratioisprojectedtoreach70percentin2025.Theincreaseinthedebt-to-GDPratioresultingfromthepandemicwasapproximately20percentagepoints.Accordingly,wesimulateascenarioinwhichtheFPTLsectorhasatargetdebt-to-GDPratioof50percent.Asecondkeypolicychoiceishowrapidlytobringthedebt-to-GDPratiodowntothetargetlevel.Giventhatwearesimulatinga20-percentagepointreductioninthedebt-to-GDPratio,weassumethatthedebttargetistobeachievedwithin10years.Athirdpolicychoiceiswhethertheadjustmentwillbethroughataxincrease,anexpenditurereduction,orsomecombinationofthesetwomeasures.Inthescenariosummarizedbelow,weassumethatallofthefiscaladjustmentoccurson8?/?AnEvaluationofThreeAlternativeFiscalAnchorsforCanada?/?9theexpendituresideofthebudgetandthatthetax-to-GDPratioremainsfixedatitsinitialvalueof30percent.Afourthkeypolicychoiceiswhetherthegovernmentcutsconsumptionspending,capitalspending,orboth.Inthisscenario,weassumethatFPTLsectorgovernmentscutconsumptionandcapitalexpendituresinthesameproportion,eventhoughinstitutionalconstraints,suchasunioncontracts,andthedesiretoprotectkeypublicservices,suchashealth,education,andsocialservices,oftentiltthepolit-icalcalculusinfavourofcapitalspendingcutswheretheconsequencesarelonger-termbutlessobvioustothepublic.Giventherelentlessincreasesinthedebt-to-GDPratiointhebasecasescenario,arelativelylargeinitialincreaseintheprimarybudgetbalanceisneededtobenddownthedebtratiocurve.Inthisscenario,programexpendituresdeclinefrom37percentofGDPin2025to31.25percentin2030.(Thisisaverylarge,andperhapsunrealistic,fiscaladjust-mentoverarelativelyshorttime.)Asaresult,theprimarybudgetbalanceswitchesfromadeficitoftwopercentofGDPtoaprimarysurplusin2030of3.75percentofGDP.Followingthisperiodofexpenditurerestraint,theprogramexpenditure-to-GDPratiograduallyincreasestoitslong-runvalueof35.71percent,whichisconsistentwithmaintainingthedebtratioat50percentofGDP.6Figure2showsthetimepathsofthedebt-to-GDPratio,theeco-nomicgrowthrateandrealinterestrate,theprimarybudgetsurplus,andtheratioofinterestpaymentstorevenuesfromadoptingthispublicexpenditurerestraintpolicy.Asindicatedinfigure2,thedebt-to-GDPratioisloweredto50percentwithin10yearsandmaintainedatthatlevelthereafter.Withthereductionindebt-financedexpenditures,theCan-adianeconomicgrowthrateincreasesbyalmostonepercentagepointin2031,beforereturningtoitslong-runvalueof1.8percent.Thedeclineinthedebt-to-GDPratioafter2028resultsinagradualdeclineintherealinterestrateongovernmentdebtfrom0.98percentto0.38percentwhenthedebtratiohits50percent.Withthedeclineintherealinterestrateongovernmentdebt,thedifferencebetweentherealinterestrateandtheeconomicgrowthrateapproaches-1.4percent,whichmeansthatthe50percentdebtratiocanbemaintainedwithanongoingprimarybudgetdeficitof-0.71percentofGDP.Thedeclinesininterestratesandinthedebt-to-GDPratiolowertheratioofinterestpaymentstorevenuefrom6.0percentto3.41percent.Itisworthrepeatingthatwhiletheparticularfiscalpolicyadoptedinthisscenariotoobtaina20-percentagepointreductioninthedebt-to-GDPratioisnottheonlyonethatcouldachievethatgoal,asharpinitialThiswouldreturntheprogramexpenditureratioclosetotheaveragefrom1990to2019.CalculationsbytheauthorsarebasedonStatisticsCanadaTable10-10-0015-01.10?/?AnEvaluationofThreeAlternativeFiscalAnchorsforCanadaFigure2:LoweringtheDebtRatioby20PercentagePointsin10Years2A:TrajectoryofNetDebt-to-GDPofFPTLSectorUsingtheTargetDebt-to-GDPFiscalAnchor,2025to20508070GDP6050of40Percent3020100

2B:RealInterestRateandEconomicGrowthinCanada,2025to2050,UsingTargetDebt-to-GDPFiscalAnchor3.02.5Percent2.01.5RealInterestRate1.0GrowthRate0.50.0PercentofGDP

2C:PrimaryBudgetBalanceofFPTLSectorUsingTargetDebt-to-GDPFiscalAnchor,2025to2050543210-1-2-3

2D:RatioofInterestPaymentstoRevenuesofFPTLSectorUsingTargetDebt-to-GDPFiscalAnchor,2025to205076543210Source:CalculationsbyAnEvaluationofThreeAlternativeFiscalAnchorsforCanada?/?11reductioninthepublicexpenditure-to-GDPratioisanecessaryfeatureofanyexpenditurerestraintprogram,giventheunsustainableincreaseinthedebt-to-GDPratiointhebasecasescenario.AthresholdratioofinterestpaymentstorevenuesAsafiscalanchoror“guardrail”forthefederalgovernment,DavidDodge(2020)hasproposedkeepingtheratioofinterestpaymentstorevenuesbelow10percent.Recallthatinourbasecasescenario,theinterestpay-mentratiofortheFPTLsectorwouldexceedthisceilingin2039,andthatitwouldcontinuetoincreaseafterthat.Inthissection,wesimulateapolicyofimplementingwhatwewillcalltheDodgeRule.7AnimportantpolicychoicethatneedstobemadetoimplementtheDodgeRuleistheinterestpayment-to-revenueratiothatwouldtriggerapolicyresponsetopreventtheratiofromexceedingthe10percentceiling.Inoursimulation,weassumethatwhentheratioofinterestpaymentstorevenuesreaches8.0percent,governmentsadoptmeasurestokeeptheratiofromexceedingthe10percentceilingrecommendedbyMr.Dodge.Anaturalandperhapstheonlypossiblepolicyresponsetotheprospectofbreachingtheceilingwouldbetoincreasethedenominatoroftheratio,i.e.,revenues,becausethenumerator,interestpayments,arelargelybeyondagovernment’scon-trolintheshorttomediumterm.TheDodgeRulethusimpliesthatthefis-calpolicyadjustmentstopreventtheinterestpaymentratiofromexceed-ingceilingwouldinvolvetaxincreases,ratherthanexpenditurerestraint.TheimplementationoftheDodgeRuleisbasedonasequenceofannualtaxrises,startingin2034,thatwouldraisethetax-to-GDPratiofrom30percentto33.6percentin2038.Thehighertaxrevenueswouldbesufficienttoreturntheinterestpaymentratiobackto8.0percentin2050.Figure3showstheimpactofthissequenceoftaxincreasesontheotherkeyfiscalandeconomicvariables.Notethatthedebt-to-GDPratioinitiallyincreasesandapproaches90percentbecausethefiscalpolicyadjustmentisdelayeduntiltheinterestpaymentratiohits8.0percent.However,withthetaxincreasesstartingin2034,theprimarybudgetbalancerapidlyincreases,fromadeficitof2.4percentofGDPtoasurplusthatisclosetoonepercentofGDP,andthedebt-to-GDPratioisonadownwardtrajec-toryby2050.Thetaxrateincreaseshaveanadverseimpactontheeco-nomicgrowthrate,whichdeclinesfrom1.74in2034to0.10percentin2039beforerecoveringto1.41percentby2050.ThelargegapbetweentheOneconcernaboutusinganinterestpaymentratioasafiscalanchor,especiallyforaprovincialgovernmentsuchasAlberta,isthatyear-to-yearrevenuefluctuationscouldtemporarilypushtheratioabovea10percent12?/?AnEvaluationofThreeAlternativeFiscalAnchorsforCanadaFigure3:AdoptingtheDodgeRuleontheRatioofInterestPaymentstoRevenues3A:NetDebt-to-GDPofFPTLSectorUsi