Oliver’s focus on zero deficit is purely political

Posted on August 18, 2014 in Debates

TheStar.com – Opinion/Editorials – It may make political sense, but from the point of view of the national good, the Harper government’s fixation on eliminating the deficit at all cost makes little sense
Aug 18 2014.   Editorial

Say this for Joe Oliver: he’s nothing if not consistent. The federal finance minister was back at it this past week, banging the drum for the Harper government’s drive to eliminate Ottawa’s deficit at all costs while tempting voters with tax cuts just in time for next year’s election.

From a purely political point of view, it makes perfect sense. The Conservatives have been trailing the Liberals in the polls for months, and Prime Minister Stephen Harper has nailed his colours to the mast of deficit elimination by 2015. Failing to meet that goal would be embarrassing, at the very least.

But from the point of view of the national good, the Tory fixation on the deficit makes little sense. And nowadays it’s not just left-leaning economists and social activists who are making that point. Some well-credentialed fiscal conservatives are also chipping away at the Tory case.

In a widely discussed paper for the business-oriented C. D. Howe Institute, McMaster University economics professor William Scarth concludes the Tories have it all wrong. He says we’re in “non-normal” times, when interest rates are very low and growth is low or non-existent in many countries. So the government should use fiscal policy to take a more active role in getting the economy moving.

Instead of cutting the deficit to zero by next spring – as the Conservatives are determined to do to fit the election cycle – Scarth says they should stretch that out for three more years. He calculates that would mean running a deficit of about $10 billion a year through that time, boosting the GDP by eight-tenths of a percentage point and bringing down the unemployment rate.

The cost would be a slight increase in Ottawa’s projected debt-to-GDP ratio – not enough to worry the markets. The bottom line, he concludes: “A government that emphasizes its commitment to protect the interests of working Canadians should not reject this opportunity to lower unemployment when it can be achieved without a serious trade-off.”

Oliver, no surprise, came down on the professor like a ton of bricks. “Our government,” he huffed, “will not open the taps on reckless spending.”

The minister may have been a bit sensitive because Scarth’s paper followed closely on one by David Dodge, the former Bank of Canada governor who is now a senior adviser at the blue-chip law firm Bennett Jones.

Dodge used different reasoning to get to a similar conclusion – that this is not the right time to cut spending in order to get to a balanced budget at all costs. Instead, he wrote, government should take advantage of record low interest rates to invest in infrastructure with the goal of making long-term improvements in Canada’s lagging productivity.

Dodge’s conclusion: “It is important to realize that in the current environment of low long-term interest rates, fiscal prudence does not require bringing the annual budget balance to zero almost immediately.”

Of course, this doesn’t apply to all government, at all times. Ontario, for example, is in a more precarious financial position than Ottawa, and Scarth made clear that he thinks the province should be more cautious about spending until it gets its house in order.

But taken together, Scarth and Dodge drive a truck through the Harper government’s insistence that pushing the deficit to zero is the be-all of federal fiscal policy. And they make it clear that by focusing on that, the Tories risk giving up opportunities to deal with pressing issues – the painfully slow growth in jobs and Canada’s worrisome lack of long-term investment for the future.

That’s what Oliver should be concentrating on as he begins the long process of drawing up a federal budget for next spring. Instead, he’s already dangling tax goodies in front of voters, testing out which ones might help the Tories regain their lost popularity.

It’s an old game, and who knows? It might even work one more time. But it’s far from the best approach to dealing with what ails Canada’s economy.

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