Mr. Harper has successfully managed his policy agenda by appealing to Canadians’ “fears”.  There was his appeal to Canadians’ fear of domestic terrorists that led to Bill C51. The government’s “law and order” agenda was based on Canadians fear of violent crime and their concern for their personal safety. And there is now his appeal to the concern of Canadians over jobs and income security, and their fear that this may not be the right time to risk a change in government (the same appeal was successfully made in the 2011 election).

But perhaps his most successful policy agenda has been based on the fear that Canadians have of budget deficits and debt. According to Mr. Harper, and his Finance Minister Joe Oliver, running a deficit would quickly “turn Canada into Greece” and Canadians would risk losing everything. Mr. Harper has been so successful in promoting this fear that both the Liberals and the NDP have committed to balanced budgets in their election platforms. The generally accepted political wisdom is that any party willing to “accept” a deficit and more debt would be trounced in the election.

In the 2015 budget omnibus bill, the government included balanced budget legislation that requires future governments to implement a plan to eliminate any deficit. Perhaps the BBL was in response to the Conservatives’ dismal fiscal record.  Under the Harper government, there have been eight years of deficit and the federal debt has been increased by $157 billion.

The BBL did not receive much attention at the time since the government was forecasting surpluses and so it didn’t seem relevant. But now the outlook has changed and there is a good possibility that the budget will be in deficit this year.

Even the Prime Minister now accepts that the economy is in a recession and that growth for the year will be much lower than forecast. Oil prices have fallen back to $45 a barrel whereas the budget assumed they would average $54 a barrel for 2015. The PBO and others have forecast that the budget will show a deficit of as much as $1.6 billion. The outlook for future years is becoming more problematic.

From an economic perspective, deficits this small are completely irrelevant. But Mr. Harper has made eliminating the deficit the basis of his political brand as a good “fiscal manager” and he will have to live with the political fallout.

One of the first things a new government will have to after October 19th is bring in a new Economic and Fiscal Update, probably by late November. This would form the basis for consultations on the 2016 budget. This update will in all likelihood show a deficit for this year and possibly for subsequent years. If the Liberals or NDP are elected one thing is certain. They will go through the “books” with a fine toothcomb and show that the Conservative government was mismanaging the government’s finances. This happens all the time, whenever there is a change in government, at both the federal and provincial level.

And this is where the balanced budget legislation (BBL) comes important. According to the BBL, the government would have to present a plan in the 2016 budget to eliminate any deficits. At a minimum, such a plan must include a freeze on the salaries of the Prime Minister, all Ministers and Deputy Ministers and a requirement that any public service salary increases be absorbed in Departmental operating budgets.

For the Conservatives, this would not be a problem, assuming that they don’t rely on some creative bookkeeping to eliminate the deficit.  For the Liberals and the NDP, the situation would be more problematic.  Mr. Trudeau has already stated that he will not commit to a date for eliminating the deficit until he sees how bad the situation is. Mr. Mulcaire has said nothing. Why would they want to be constrained by a Conservative fiscal orthodoxy that is bad fiscal policy? The best strategy for the Liberals and the NDP is to get rid of the BBL. But would they?

Why are Canadians so hung up on deficits compared to citizens in any other G7 country or for that matter most advanced countries? What other country has a BBL? In the EURO area, the “acceptable” deficit target is 3% of GDP and the “acceptable” debt to GDP target is 60% of GDP.

The original deficit target in the Liberals 1993 election campaign was also 3% of GDP. However, the deficit was eliminated within three years, in part, because of unexpected strong global economic growth. But it was not the initial objective. In today’s terms, a 3% deficit target would amount to a deficit of about $60 billion dollars. No one is suggesting such a deficit. But according to a recent C.D. Howe study, the federal government could run a permanent structural deficit of 1% of GDP ($20 billion) and still maintain a stable debt ratio of 25%, which happens to be the Conservative government’s target for 2022.

Canadians have been convinced that leaving more debt to our grandchildren is wrong.  They are partly right.  Borrowing to pay for consumption is not a good idea.  Borrowing to make investments that will also benefit future generations on the other hand is what governments get elected for. Past governments understood this.

Not all deficits are bad and not all debt is bad. It depends on the overall economic and financial circumstances and what the borrowing is being used for. At the present time, the federal government has a sustainable fiscal situation with a low and falling debt ratio. This is not the situation for the provinces. The federal government has the capacity to borrow and to invest, as recommended by the IMF.

This will be the biggest decision that any new government will have to make.