Real Spending Cuts May Be Needed To Balance The Federal Budget

Ben Eisen, Blog, Role of Government, Taxation, Uncategorized

Today, the Globe and Mail reported that new economic forecasts showing lower-than-expected growth this year will result in a budget deficit that is $7B larger than what the government projected in the spring

This development highlights the fundamental problem with the government’s current approach to deficit reduction. The government’s existing strategy is, essentially, to continue to raise program spending over time, but to hold the rate of spending growth lower than the projected rate of growth for federal revenues. If revenues were to increase faster than spending growth over time, the deficit would indeed shrink and eventually disappear.

The problem with this approach is that it is inadequate to meet the serious fiscal challenges we face as a country and, as this week’s new economic forecast illustrates may result in economically damaging increases to the deficit if revenue growth turns out to be slower than expected.

When you consider the fact of an aging population and the possibility of slow global economic growth, Canada may face fiscal pressures in the years ahead that are comparable to those we experienced in the early 1990s. It is therefore unlikely that a timid approach to austerity will be sufficient to restore the health of government finances. Instead, it is likely that the federal government will need to pursue real cuts in government spending, just as the Liberal government of the early 1990s did the last time a major federal deficit problem was solved in this country.