Don’t Fret over Deficits and Debt

Posted on in Governance Policy Context

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PolicyAlternatives.ca – Publications/Monitor
Sept/Oct. 2019.   Sheila Block

In the 2015 federal election, Canada’s political parties saw advocating for deficit spending as a risky political move. The Conservative Party ran on balanced budgets and reducing the role of the state. The NDP promised four years of balanced budgets. Of the major parties, only the Liberal Party advocated for deficit spending. Even then, the deficits they proposed were small—less than $10 billion a year for the first three years, and a balanced budget by the fourth.

It was hardly a departure from political orthodoxy. And while fiscal timidity on the campaign trail may have been effective, in government it has hampered federal investment in physical and social infrastructure. Federal program spending as a share of GDP remains at historic lows.

In 2019, the combined impact of a climate crisis, a crisis in affordable housing in major centres, and an increase in precarious work means that governments need to make historic investments now: in green infrastructure, in expanding the social safety net, and in increasing the supply of affordable housing. A debate about who can spend less in government is the last thing we need.

Government debt rose sharply globally after the 2008 financial crash as employment fell and stimulus spending became all the rage, even for conservative governments. But that same deficit spending, which staved off a more serious economic collapse, soon became, to many of those same governments, an opportunity to leverage public support for a sharp policy turn toward austerity.

As a result, many governments magnified the human costs of the Great Recession and extended, by several years, the suffering it had caused. Research shows that austerity programs in both Greece and the U.K., which cut benefits for pensioners and incomes and services for marginalized populations, resulted in premature deaths. In the debate and subsequent acknowledgement of the failure of these austerity policies, these human costs received far too little attention.

Much of the public support for austerity policies depends on framing public debt as equivalent to household debt. Yet this is a gross mischaracterization. Families manage debt over a lifecycle. It is prudent early in that cycle for families or individuals to take on debt, perhaps to pay for education or purchase a home. Later on, ideally, individuals or families will move from borrowing to saving for retirement.

Governments do not face the same lifecycle constraints. They have a responsibility to continue borrowing and investing for future generations. Each generation of taxpayers takes on some of the costs for providing services to previous generations as well as their own and future generations. When it comes to debt, we are all always paying it off — and paying it forward.

Furthermore, higher levels of borrowing that might be risky for individuals or families are prudent for governments, since risk is spread across the whole population. Financial markets find governments to be extremely reliable borrowers for this reason and due to their ability to tax. That is why governments can borrow at much lower interest rates than households.

The experience of the last eight years shows there is a continued appetite in bond markets for government debt. Interest rates remain at historic lows. And despite the predictions from the mainstream economic policy community, the Greek crisis did not spread like wildfire to other national economies.

The experience since 2010 has also shown that government retrenchment has not led to increased economic activity but higher unemployment and slower economic growth. U.S. economist Paul Krugman’s research has shown that austerity programs and slower growth go together, and the worse the austerity, the worse the economic performance will be.

International Monetary Fund research published in 2016 rejected the notion that austerity could be good for growth by boosting the confidence of the private sector to invest. It concluded instead that such austerity programs increased inequality, which “in turn hurts the level and sustainability of growth.”

These debates, and the intellectual energy that they take from progressives, move us further away from more fundamental questions we should be addressing. In an era of climate crisis, for example, why are we debating economic growth divorced from whether the form and type of growth brings us closer to, or further away from, climate sustainability?

There are currently no credible reasons to doubt the solvency of the federal government, or any of the provinces for that matter. Federally in particular we have the fiscal room to be spending much more ambitiously on housing, education, long-term care, pharmacare and other social programs, and to protect the natural environment. In fact, it would be bad for the economy not to. M

Sheila Block is a senior economist in the CCPA’s Ontario office.
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CANADA’S REVENUE PROBLEM

The direction and scale of recent federal program spending hasn’t turned the tide on decades of neoliberal economic policy and the damaging rise of inequality that has followed in its wake. In 2017-18, federal program spending was 14.5% of GDP—an increase of 1.6 percentage points from 2015, but still shy of postwar levels — and slated to fall to 13.8% by 2023-24. On the other side of the ledger, federal revenues are also near all-time lows relative to GDP. Revenues as a share of GDP, at 14.5%, are two percentage points lower than the 50-year average of 16.4%, representing an annual loss of more than $40 billion. Canada, in other words, doesn’t have a spending problem, it has a revenue problem.

Katherine Scott, senior economist, CCPA

See Chart:  Federal government revenues and program expenses as % of GDP, 1966–2024

https://www.policyalternatives.ca/sites/default/files/uploads/publications/National%20Office/2019/09/CCPA%20Monitor%20Sept%20Oct%202019%20WEB.pdf

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