Social Policy in Ontario

Honest debate needed on deficits

Posted on February 22, 2008 in Debates

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TheStar.com – comment – Honest debate needed on deficits
February 22, 2008
Carol Goar

It has been drummed into our heads for 15 years that deficits are toxic.

First came the dire warnings from bankers and economists. The Wall Street Journal ratcheted up the anxiety in 1995, calling Canada “an honorary member of the Third World” and predicting it would “hit the wall” without radical cuts in government spending.

Then came the harsh medicine. Paul Martin, who was then finance minister, chopped health and education transfers, Employment Insurance benefits, agriculture assistance, business subsidies and dozens of federal programs. “It is crucial that government get its house in order,” he told Canadians.

Next came the blandishments. The payoff for staying the course would be a favourable job creation climate, new resources to invest in health care, higher learning and technological innovation and eventually tax cuts, Martin promised.

Finally came the back patting. For a decade, our leaders congratulated us for our sacrifice, our resolve and our sound economic fundamentals.

So thoroughly has the message sunk in that no government would dare run a deficit.

There certainly won’t be one in Finance Minister Jim Flaherty’s budget on Tuesday. None of the opposition parties will suggest counter-cyclical stimulus. No mainstream economist in Canada will raise the possibility of dipping into red ink to keep people working and businesses investing.

To be sure, deficit financing is risky. It can become habit forming. It leads people to believe they can have more than they pay for. It fuels inflationary pressure. And it leaves future taxpayers on the hook for current spending.

But as the global economy contracts, most industrial countries are at least looking at stimulative measures.

Some, such as the United States, are already injecting billions of government dollars into the economy in hope of staving off a deep recession. Others such as Britain and Spain are promising help for struggling sectors. Even the International Monetary Fund, which usually scolds governments for living beyond their means, is urging them to loosen their purse strings.

Here is what passes for debate in Canada.

Industry Minister Jim Prentice: “Stéphane Dion has a spending problem. He cannot keep all of these promises (the Tories had just released a 68-page tally with a $98 billion price tag) without running up deficits and sending the country deeper into debt.”

Dion: “Never will I allow my country to go through that again. In order to mask the mistakes they’ve made, they’ve come up with this big 68 pages of lies.”

This sort of finger pointing serves no one.

There are intelligent arguments to be made for and against deficit financing. Under some circumstances it works, under others it does more harm than good. It has to be carefully timed to strengthen, not overheat, the economy. The benefits have to outweigh the drawbacks. Regional and structural factors need to be taken into account.

We need a rational discussion, not uninformed posturing.

No doctor would rule out a medication on the basis of sentiment. No scientist would refuse to follow a logical line of inquiry.

The irony is that the country may end up with a deficit on Flaherty’s watch, whether he wants one or not.

The finance minister has reduced the large surplus he inherited to a tiny sliver by chopping taxes and jacking up military spending.

That doesn’t leave much manoeuvring room, if the economy weakens faster than he anticipates. (Already the growth projections in Flaherty’s October economic statement – 2.4 per cent this year and 2.7 per cent next year – look more wishful than feasible.)

The finance minister could, of course, slash government services to avoid a deficit. But he’d have to explain why he waited until the economy was in trouble to take action. And his boss, Stephen Harper, would have to face the electorate as the prime minister who emptied the treasury, then started preaching restraint.

Deficits should be eliminated when times are good. We got that right.

An unbalanced budget is not a moral failure when times are bad. We still have to learn that.

Carol Goar’s column appears Monday, Wednesday and Friday.

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