Don’t Backpedal on Budget

Frontier Centre, Taxation, Uncategorized, Worth A Look (historic)

 

The last thing the federal Tories should be doing with their new mandate is backpedaling on balancing the budget. Instead it’s the first.

From the mid-1970s through the early 1990s Canadians tried to get something for nothing from our governments and got nothing for something instead. We thought we learned that public borrowing is bad because the good times end with a big hangover. In fact there are almost no good times.

We know in our hearts there is no such thing as a free lunch. And if there were, government couldn’t find it in the parliamentary cafeteria with a big sign. But since Keynes and other pied pipers have proved irresistible to politicians, it’s worth reminding ourselves what they claim is on the menu.

Sure, they say, eventually you must pay back what you owe, plus interest. But when governments borrow to spend on things we value, from infrastructure to publishing subsidies to social programs, it puts money back in people’s pockets and they go spend it, companies hire more staff and, in the end, it creates such a surge of economic activity that, by the time the government has to find two, three or six per cent interest on its original “investment,” we’re so much more prosperous we make a profit on the whole deal or at least break even.

It would tax the patience of readers to no purpose to discuss in detail why this theory is wrong. For the simple fact is the bill doesn’t come due eventually. It comes due so soon governments can’t put more into the economy than they take out long enough, or in big enough amounts, for this “stimulus” to happen even if it was going to.

What about the federal borrowing tear from 1970 through 1996 that left us paying a third of revenue in interest and starving social programs to do it? Surely we got something for that splurge?

Not really. Yes, from 1970-71 to 1986-87 Ottawa spent (not adjusted for inflation, on a public accounts basis) $250 billion more than it took in, about $15.5 billion a year. But it also paid $186 billion in interest, leaving only $64 billion in total “stimulus” over 16 years, a mere $4 billion a year. And remember, if spending money you don’t have on productive things stimulates the economy, interest payments do the opposite. They aren’t something for nothing, they’re nothing for something. Unfortunately you have to pay interest on the whole $15.5 billion you borrowed which catches up with you real fast.

The conventional wisdom was that Trudeau’s binge left his successors a hangover. Actually he got the hangover himself. Already by 1981-82, a $15.7 billion deficit hurled at a sluggish economy was devoured by $15.1 billion in interest, and in total from 1970 to 1984 two of every three dollars the feds borrowed went straight out the window on debt payments.

After 1986-87, no matter how hard the feds borrowed, they couldn’t outrun the interest bill. By 1992-93, a scary $39 billion deficit was still lower than interest payments of $41 billion for a net anti-stimulus of $2 billion.

From 1987 through 2008, by its own “stimulus” theory the government sucked vitality out of the economy every single year, whether still in deficit up to 1996 or in surplus from 1997 on. After 1997, the feds managed to run surpluses and pay down $99 billion off the national debt. But during that time they also paid over $450 billion in interest.

How fast does the bill come due? Well, Canada’s accumulated federal debt is just over $560 billion, almost all since Trudeau. And in those years we’ve paid over $1.1 trillion in interest.

Now Harper and Flaherty say it’s worth doing again. When the recession hit in 2008, the Tories went from a $9.5 billion surplus to a $55.6 billion deficit in just two years. But the latter only meant $26 billion in net “stimulus” and the interest payments immediately started rising again. By their own calculations the Tories are already sucking vitality out of the economy this year to the tune of $3.5 billion, with lots more to come.

We just can’t afford it.