As the Harper government prepares to take Canada back into substantial multi-year deficits, the Prime Minister should be mindful of advice from the famous French philosopher Blaise Pascal. He wrote: “In each action we must look beyond the action at our past, present and future state, and at others whom it affects, and see the relations of all those things. And then we shall be very cautious.”
A look at the past, present and future of government spending, deficit financing and their impact reveals a need for making tough decisions to keep the budget balanced.
Most groups and organizations from across the political spectrum are arguing that the federal government must deficit spend to “spur the economy.” The International Monetary Fund (IMF) even suggests that governments should boost spending by 2% of GDP. But the Canadian government has already injected $37billion per year more than prudent spending growth would allow.
Since 1997-98, the government has increased program spending by almost $85-billion. Had the federal government limited its spending growth rate to the same growth rate of Canada’s population and inflation combined, spending would have grown by only $48-billion during the same period. This means, our government is already spending 2%-3% of GDP over and above what reasonable growth should have been and is already spending more than the IMF suggests needs to be injected.
This past overspending hampers the ability for current governments to respond nimbly to economic challenges like those faced today. That is why, in its budget, the federal government should be careful to establish a fruitful and competitive economic climate for tomorrow. Growing the size and cost of government with deficit spending won’t accomplish this.
Future taxpayers will be the ones on the hook if the government fails to take a cautious approach to deficit spending. Already, 14¢ of every tax dollar is spent just to pay the annual interest on the federal debt. Despite this, many organizations (the Canadian Advanced Technology Association and the Canadian Centre for Policy Alternatives just to name two) are suggesting the government run deficits that could easily exceed $100-billion over three years. With current federal debt levels standing at $457-billion, this would increase the federal debt by a whopping 22%.
One problem on the laundry list of problems with more debt financing is that governments are better at growing debt than paying it off. The last period of deficit financing lasted 25 years. In just 10 years — from 1987-88 to 1997-98 — the federal debt grew by some $273-billion. Yet, in the following 10 years of surpluses, only $105-billion was repaid. It is not a sustainable approach to public financing to run deficits for twice as long as surpluses and to pay back less than half of what is borrowed.
Balancing the budget wouldn’t be easy. It would require the government to make tough decisions to reduce the size and cost of government. It would mean saying no to organizations looking for handouts and bailouts. It would likely be opposed by the opposition coalition. It would be popular, though. A national Ipsos-Reid poll from October, 2008, indicated that 82% of Canadians favour government cutting spending and 57% oppose running deficits.
While Mr. Harper and Mr. Flaherty prepare the budget, it is clear the voices of today are gaining their attention; many of whom want the government to continue its high-spending ways. However, the government would be wise to listen to the voices of the past and future. Those of the past know the harm caused by systemic government deficits. Those of the future surely don’t want to pay for yesterday’s and today’s financial imprudence. The Harper government should proceed down its current path with extreme caution.
Kevin Gaudet is Ontario director of the Canadian Taxpayers Federation.