Back to the Deficit Era?

-- (historic), Commentary, Taxation, Uncategorized

The recent collapse in credit markets, followed by the stock market, and which was preceded by a decline in manufacturing and multi-month softening in commodity prices, all add up to one result for government: less revenue this year and next.

The result is chatter about how it might be necessary to again run deficits. During the federal election campaign, Prime Minister Stephen Harper vowed to not run a deficit — in this fiscal year. Post-election, the Prime Minister and Finance Minister Jim Flaherty have been more circumspect about such promises for future years.

In Ontario, premier Dalton McGuinty argued that after 200,000 layoffs in his province, he wasn’t about to “shut down their hospitals?” “It just doesn’t make any sense,” said McGuinty to a Toronto newspaper.

Laying off nurses and doctors might not make any sense, but neither does subsidizing the automotive sector in southern Ontario. The most recent figures, now several years old from Statistics Canada given the time lag in publishing data, lists provincial corporate welfare from Ontario’s government at over $2.1 billion for operating and capital expenses. If the Ontario premier wishes to avoid cutting hospital expenditures, he could instead cut corporate welfare.

But the politicians are not the only ones who muse about a return to more red ink, this after only one decade of surpluses in the case of the federal government and fewer such years in most provinces. Tim O’Neill, a former economist with the Bank of Montreal, told the federal government in 2005 to consider revising their no-deficit rule.

In a recent interview with the Financial Post, O’Neill said it might make more sense to balance the budget over the medium term, “rather than every single year.” He also argued that spending cuts or tax increases would worsen current economic weakness by removing money from the system.

In the months ahead, Canadians will hear more calls for a return to deficit spending but here’s why almost all of it will be misplaced.

The argument that government spending cuts will exacerbate economic weakness falls flat based on the empirical data. Canada’s Gross Domestic Product in July was over $1.2 trillion and federal program spending was budgeted for $208 billion in the current fiscal year and $10 billion more — $218 billion — in 2009-10.

Suppose that the federal government is in danger of running a $5 billion deficit in 2009-10. To kill the possibility of red ink, Ottawa would only need to restrain its growth in spending by $5 billion

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But even if Ottawa faced a $15 billion deficit next year, and had to cut actual program expenditures from this year’s planned $208 billion to $203 billion, the notion that such a reduction would “exacerbate” current economic weakness is fanciful. A $5 billion cut in federal spending amounts to less than three per cent of federal spending, and amounts to a microscopic four-tenths of one per cent of Canada’s GDP.

Frankly, a cut in spending — and unlike a tax hike which would pummel individual Canadians — would relay a positive signal about Canadian government finances. Keeping Ottawa’s (and provincial) books in the black would give the message that our political class will protect the gains made over the past decade, that Canadians will return to the we’ll-pay-for-it-tomorrow syndrome which took decades to reverse.

Is there ever a time to run a deficit? Sure. In the event of another depression or another world war but the current economic weakness and the war in Afghanistan don’t fit such descriptions.

There is one last reason why Canada’s politicians should avoid new red ink: It’s because we haven’t paid off the bills from previous deficits. Between 1962 and the 1998 fiscal year, there were only two surplus years, in 1966 and 1970. The other 33 years all produced red splotches on Ottawa’s books. The result was a federal debt that yet stands at $454 billion and debt interest that costs $31.5 billion annually.

Because of past federal and provincial deficits, Canadians in 2008 still pay for kidney operations performed in 1972, highways and hospitals built in 1983, and for a business subsidy handed out in 1989, among the other millions of expenditures over the decades. The last thing any responsible politician should do is now send future Canadians a bill for additional debt when we’ve not even paid for the previous red ink

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