Balanced budgets are lifesavers in turbulent times
TheGlobeandMail.com – Opinions
Published on Friday, Jan. 29, 2010 Last updated on Saturday, Jan. 30, 2010. Jeffrey Simpson
Six trillion U.S. dollars. Or, for those of you with a taste for numbers: $6,000,000,000,000.
That is the sum the United States will be borrowing in the next decade, adding the $6-trillion to the country’s already bloated national debt of almost $9-trillion.
It might be worse. The $6-trillion projection from the bipartisan Congressional Budget Office this week presumes good news: no steep rise in interest rates, no external shocks, no renewal of former president George W. Bush’s tax cuts, some modest degree of spending restraint. Subtract any of those, and the borrowing will be more than $6-trillion.
U.S. legislators know these alarming numbers, because the CBO reports them to Congress. So does President Barack Obama. Politicians know how dangerous is this level of borrowing, how much more indebted their country will be to China and other lenders, how much more of every tax dollar will go to service the debt rather than pay for services.
And yet, there is almost no chance that the U.S. political system can deal with the forthcoming decade of massive borrowing. Those who think it can be dealt with by spending cuts alone are dreaming, given that the defence budget is apparently inviolate and eats up almost half of discretionary spending. The very word “tax” is so toxic in U.S. politics that neither Republicans nor Democrats will even utter it.
This massive forthcoming borrowing will push the country’s debt to GDP ratio from 53 per cent in 2009 to 67 per cent in 2019, so that the world’s biggest debtor will be heading deeper and deeper into the red. The result will be the further long-term enfeeblement of the United States, the country with which Canada has so closely tied and aligned itself.
This massive U.S. indebtedness poses the single biggest uncertainty for the world economy in the years ahead. How will the debt be financed? How high will interest rates have to go to finance it? What will be its effects on the U.S. dollar and other currencies? What’s the danger of inflation? What’s the level of confidence in the country, its economy and its currency?
For Canada, the debtor’s neighbour, the U.S.’s inability to get a grip on any of its major national problems, and especially its borrowing, leads to the uncomfortable question: How do we protect ourselves from our neighbour’s terrible habits?
Sadly, we cannot. When the CBO projects a slow recovery – 2- to 2.5-per-cent growth for the next several years, with unemployment at about 9 per cent – only a Canadian government in denial would suggest our economy can do appreciably better. Remember, too, that studies of financial meltdowns such as the one that created this recession suggest a full recovery time of about seven years. Put another way, the Conservative government’s strategy of growing our way out of deficit with strong growth and spending restraint is every day looking more like a political illusion.
More seriously, what should Canada do with so much economic uncertainty spilling into the world economy from the voracious borrowing demands of the United States and, in fairness, other uncertainties such as the huge deficits of Europe and Japan?
Metaphorically, think of Canada as a rather small boat with clouds and storms showing on the radar screen. You might try to steer around them, but that won’t be possible. The best precaution, however inadequate, is to don a life preserver.
Think therefore of a balanced budget as a life preserver, something that greatly helped the Canadian economy before, and might be called upon to do so again.
From 1995 to the onset of recession, Canadian governments ran surpluses or balanced the budget. The country benefited from strong economic growth. The result was a declining debt, debt-to-GDP ratio, solid credit ratings, better growth than almost anywhere else and excellent job creation, despite predictions that tighter fiscal policy would be a job-killer.
Today, when Prime Minister Stephen Harper and his colleagues brag that Canada came through the recession better than any country, the credit is due to the life jacket of those balanced budgets and surpluses.
It seems odd, therefore, for the same government that underscores how relatively well off Canada now finds itself to ignore the reason why, and to say that a return to a balanced budget can wait many years. It is as if the lessons of recent history have been willfully forgotten, to say nothing of prudent planning for the likely economic turbulence ahead, to which the massive borrowing of the U.S. will contribute.
As for the Liberals, they are comporting themselves now in an even more irresponsible fashion, pooh-poohing the importance of fiscal balance, ignoring the risks of economic turbulence ahead, forgetting their own excellent record of taming past deficits, ruling out any responsible debate about raising taxes, all because they tremble at the prospect of being politically bludgeoned by the Conservatives’ ferocious attack ads.
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