Social Policy in Ontario

Daring to think about deficits

Posted on November 24, 2008 in Debates

—

TheStar.com – Opinion – Daring to think about deficits
November 24, 2008. Carol Goar

There are two kinds of deficits.

The first type, which most governments and mainstream economists are reluctantly prepared to countenance, is a cyclical deficit. It lasts a year or two. It results from a temporary drop in tax revenues and an involuntary increase in expenditures (such as Employment Insurance).

The second type, which almost no one wants to talk about, is a structural deficit. It is ongoing. It results from a policy decision to invest in the building blocks of economic growth (education and training, research, public infrastructure, state-of-the-art technology and social supports.)

A group of economists, led by Louis-Philippe Rochon of Laurentian University, has launched a campaign to get both kinds of deficits on the national agenda.

Rochon and his colleague, Mario Seccareccia of the University of Ottawa, have drafted a five-page memo explaining why Canada should engage in long-term deficit spending. They’ve secured endorsements from 21 other economists.

None of the signatories is from the University of Toronto, Queen’s, McGill, Western, the University of Alberta or the University of British Columbia. “We didn’t approach them,” Rochon admitted. “They are bastions of mainstream economic thinking.”

Now the two professors hope to spark a public debate. They’ve posted their paper online (www.iepi.laurentian.ca) and sent it to a few journalists and politicians.

They acknowledge that they’re swimming upstream. They’re aware that many Canadians said “never again” after enduring painful cutbacks to reverse the debt buildup of the Trudeau-Mulroney era. They realize that Prime Minister Stephen Harper has ruled out “ongoing, unsustainable structural deficits.”

But they think their arguments are strong enough – and the economy is weak enough – that people will at least give them a hearing.

Here is the case they make:

The bailouts, liquidity injections and promises of fiscal stimulus of recent weeks – while welcome – will not fix what ails the global economy.

Neither will tax cuts and interest rate reductions. “Current problems are too deep-seated to be cured by consumption-led growth alone.”

What is needed, Rochon and Seccareccia maintain, is a new approach to federal budget-making.

Under their model, Ottawa would differentiate between day-to-day expenditures and long-term investments (as most businesses and municipalities do.)

The government’s goal would be to keep its operating budget in the black over the business cycle, while carrying a manageable deficit on the capital side to ensure that Canada has the infrastructure, training and social services it needs to sustain its standard of living.

Technically, this would be easy to do, the two economists suggest. Federal accountants already distinguish between operating and capital expenditures.

Nor should it be hard sell politically, they contend. Many families borrow to pay for their homes and cars, while living within their means on a day-to-day basis. Many companies go into debt to upgrade their facilities and equipment, but run their businesses on a pay-as-you-go basis. “The idea that we can’t be fiscally responsible while undertaking public investment at the same time is a myth.”

The challenge will be to find a high-profile champion for the idea.

None of Canada’s five party leaders supported deficit spending in this fall’s election. Circumstances have forced Harper to deviate from his hard-line stance, but he remains extremely wary of red ink, as are his parliamentary opponents.

The business community certainly isn’t going to advocate that the government take on more debt. Corporate leaders dislike fiscal imbalances more than politicians.

Even in academe, few economists are willing to get too far ahead of public opinion.

Rochon and Seccareccia don’t anticipate a groundswell of support. They aren’t expecting to see evidence of their proposal in the next federal budget.

But they believe this is the right time to start the conversation. “A year ago, who would have thought we’d be talking about deficits?” Rochon asked. “We’ve taken a good step, grudgingly or not.

“But we need a substantial public investment program so the economy can grow, provide employment for Canadians, support private sector productivity and generate future tax revenues.”

Trusting the markets, Rochon contends, is riskier than running a structural deficit.

This entry was posted on Monday, November 24th, 2008 at 4:49 pm and is filed under Debates. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.