No major party in the current federal election promises to balance the budget by the end of its first term. Is this a problem? Philip Cross, senior fellow at the Macdonald-Laurier Institute, argues yes, while Andrew Jackson, the senior policy adviser at the Broadbent Institute, argues deficit financing benefits the economy.
YES
While the anti-deficit consensus began fraying earlier in some provinces, it remained largely in place at the federal level into the 2015 election, when two of the three main parties ran on a platform of balancing the books unless the economy was in recession.
However, the Liberal’s unexpected 2015 victory on a platform of running small deficits to finance spending targeted to infrastructure opened the political floodgates to higher deficits. The Liberals quickly overshot their promised deficit ceiling and reneged on a pledge to balance the budget by the end of their first term.
In the 2019 election, no major party promises to balance the budget by the end of its first term as they compete to buy the votes of an electorate too busy inflating their personal debt to be unduly concerned about the government’s.
The track record since 2015 does not justify this indifference to deficits. Canada has little to show for four years of more federal borrowing. Economic growth has slowed, with real GDP per capita rising by an average of just 0.5 per cent in the past four years compared with 0.9 per cent in the previous four (and a peak of 3.9 per cent in the late 1990s when the federal government consistently ran large surpluses).
Nor has overall infrastructure spending risen significantly. Some projects were slow to rollout, while the Parliamentary Budget Office documented how provincial governments cutback their investment when the federal government increased its spending on infrastructure. Instead of building iconic megaprojects, like the St Lawrence Seaway, most federal spending was dissipated on transfers to people and higher benefits for the public service, which has mastered latching onto tax dollars crossing its desk for its own benefit.
One enduring legacy of deficit spending is a higher level of debt, a pointed rock lying in wait of the next ship weighed down by either interest rate hikes or, more likely, a global recession. Cyclical economies such as Canada’s with its large resource and manufacturing base need to be especially prudent about taking on debt, but this has been forgotten in recent years.
Also ignored is the lesson of the risk of soaring economywide debt levels learned bitterly by the U.S. in 2008 and Europe in 2010, never mind our own experience from the 1990s.
Some will argue that federal government debt by itself is not a concern. However, the government cannot disassociate itself from the sharply rising amount of debt in all sectors of Canada’s economy in recent years, including provincial governments, households and corporations.
Government encouraged the rise in household debt both by lowering interest rates to historically low levels and by the example of its own return to deficit-spending while arguing that there is no risk attached to more debt. Federal and provincial governments have taken co-ordinated moves to slow the growth of housing debt, a hypocritical acknowledgment of its adverse effect on both soaring housing prices and increased risk to the financial system.
Canada’s deficit-fuelled spending binge has helped to temporarily paper over the consequences of a further slowing of income growth, a chronic problem since the global financial crisis erupted in 2008.
The only permanent solution to persistent slow growth is a return to higher levels of savings and investment, which drives productivity and ultimately higher incomes. Instead of cultivating an environment that spurs more innovation and productivity, we are bogged-down in destructive debates pitting the less well-off against higher income earners and one region versus another.
The result has left us poorer economically while weakening our national unity and democracy. That is the unfortunate legacy of our unsustainable reliance on deficits to prop up spending while incomes stagnate.
Deficit and debt phobia should not stand in the way of advancing a bold environmental and social agenda, investing in programs to fight catastrophic climate change, growing insecurity, and mounting economic inequality.
Many economists once argued that budgets should be balanced in normal times. That made some sense back in the 1980s and 1990s when interest rates hit high levels and public debt was growing rapidly. But the conventional wisdom has changed because the world has changed.
In Canada, the net public debt of the federal and provincial governments is low as a share of national income compared to the peak in the 1980s and compared to the level in other advanced economies. It has been stable or falling, despite small deficits.
Since the global economic crisis over a decade ago, interest rates have been stuck at rock bottom levels.
As former chief economist of the International Monetary Fund, Olivier Blanchard, argued in his 2019 presidential address to the American Economic Association, it literally costs nothing for the government to borrow at these low rates, and there is no increased burden on the future.
Today, the Canadian government can borrow money for 10 years at a rate of 1.5 per cent, well below the inflation rate and the growth rate. At the end of 10 years, the inflation adjusted debt will have fallen, and national income or GDP will have risen, lowering the “burden” of the new debt as a share of the economy.
There is also no cost in lost private investment since business investment is low and corporations are sitting on mountains of cash because they cannot figure out where to invest. In fact, that is one reason why interest rates are so low. Corporations and the very rich are hoarding cash instead of borrowing to invest, which would bid up interest rates.
Deficits should be used to finance big public investments, which create productive assets. Unfortunately, the Liberal and Conservative parties are talking very unimaginatively about deficit financed, across-the-board-cuts to personal income taxes. These would cost a lot even though they would increase after tax incomes very little.
By contrast, think a bit about a big investment in affordable rental housing. Over a decade we could build many units funded by low rates of interest, and hold public assets whose value far exceeds the cost of building it while our debt continues to fall in real terms. Many families, especially young people, would pay much less on rent and many new jobs would be created.
Or take big investments in renewable energy and energy efficiency to cut carbon emissions. Experts tell us we have a very short time frame in which to bend the curve on greenhouse gas emissions and to decarbonize the economy.
We are hardly imposing a burden on future generations by saving the planet. Indeed, we owe it to our children and grandchildren to act decisively, now. Yet, strangely, the Green Party is the most committed to balanced budgets.
Supporters of a Green New Deal argue, quite rightly, that we need big bold programs on the scale of the New Deal of the 1930s to address the climate and inequality crises and to create decent middle-class jobs.
President Roosevelt did not let balanced budgets stand in the way of bringing about an economic recovery, and then defeating the Nazis in the Second World War. The debt was financed at very low rates, and quickly melted away as full employment and rising wages boosted tax revenues after the war.
Low interest rates on government bonds give us the means to finance major new public investments. And that is precisely what we need to do today since low interest rates alone are not enough to fuel a sustained and broadly shared economic recovery.
Instead, they have resulted in record household debt, the flip side of a housing bubble, and inflated prices of financial assets, such as shares that are mainly owned by the top 1 per cent.
A healthy economy supporting the growth of good jobs should be driven by investment, not financial froth and speculation. When businesses are hoarding cash instead of investing, there is a need for government financed investments funded from new borrowing.
Add it all up, and the case for deficit financed public investments is strong.
Andrew Jackson, the senior policy adviser at the Broadbent Institute
https://www.thestar.com/opinion/contributors/thebigdebate/2019/10/08/should-the-federal-deficit-be-more-of-a-concern.html?source=newsletter&utm_source=ts_nl&utm_medium=email&utm_email=0C810E7AE4E7C3CEB3816076F6F9881B&utm_campaign=top_16607&utm_content=a&source=newsletter&utm_source=ts_nl&utm_medium=emailutm_email=0C810E7AE4E7C3CEB3816076F6F9881B&utm_campaign=top_16607&utm_content=a05
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