Let's be clear: I believe that fiscal discipline for governments is a highly desirable thing. I was raised on the grotesquely bloated deficits of the Pierre Trudeau and Brian Mulroney eras. I have no wish to ever see those fiscal obscenities again.
Still, the Harper Conservatives' proposed balanced-budget law sticks in my craw. Not because I have an issue with the basic principles behind it. But because I fear it would promote inefficient economic policy, while hamstringing future governments from using their fiscal levers to stabilize a wobbling economy.
The proposed legislation, unveiled by Finance Minister Joe Oliver in a pre-budget speech in Toronto Wednesday, would allow some flexibility to go into deficit spending, but only in fairly severe circumstances: Mr. Oliver listed a recession, a war or a natural disaster that delivered an annual hit to government revenues of something north of $3-billion. The finance minister would be called to the carpet within 30 days of tabling a deficit budget to present a "concrete plan" to return to balance, and operating spending (as well as cabinet ministers' and deputy ministers' salaries) would be frozen.
The idea is that this builds enough flexibility for a government to deliver a fiscal stimulus in a crisis, while enforcing budget discipline the rest of the time.
But consider this: The Harper government has had budget balances as the cornerstone of its fiscal policy approach throughout its nearly decade in office.
Yet we have had seven straight years of deficits under a government committed to the goal of balanced budgets.Some might call this hypocritical. I call it prudent economic management, in the face of a severe recession and a painfully slow recovery. In terms of GDP growth, Canada's economy returned to relative "normal" years ago, yet even this deficit-cutting government deemed it wise to whittle away the shortfall ever so gradually. Had the government rushed to restore balanced budgets while the economy was still trying to dig out of the substantial recessionary rubble, the results could have been disastrous.
In short, this government has exercised wide-ranging flexibility in its own fiscal policy more often than not, to the benefit of Canada's economic stability. Yet this same government is bent on restricting that flexibility for future governments. Presumably because it's a pledge that plays well with voters, who don't trust governments to control their animal urges to spend beyond our means. With an election coming that's very much up for grabs, the Harper Conservatives most assuredly don't trust anyone who might replace them in office. And maybe, after producing seven straight deficit budgets, they don't even entirely trust themselves.
Let's say an event did come along that looked severe enough to put the budget into deficit. (The current oil shock, though neither a natural disaster or war and unlikely to trigger a recession, will slice about $5-billion off federal revenues for the next year, according to an estimate earlier this year by the Parliamentary Budget Officer.) The government overseeing that deficit would be forced into a legislated spending straightjacket that would cut operating budgets in real terms (i.e. after accounting for inflation) and, consequently, almost certainly cost government jobs. This enforced fiscal policy, far from serving as a stabilizer, would compound an economic slowdown.
The legislation could well also encourage governments to resort to short-term gimmicks to achieve a budget balance on paper, rather than face slipping into deficit. Mr. Oliver looks poised to do just that in his upcoming April 21 budget – by selling government-held General Motors shares at an enormous loss on the investment, calling the roughly $3-billion in proceeds "revenue," and thus achieving a balance with the one-time proceeds. It's like selling your car to pay the mortgage. Or, perhaps more accurately, selling the car you borrowed from your taxpayers.
The GM share sale will be dressed up as fiscally responsible government in action, but it is, in fact, precisely the opposite. It was a short-sighted decision that squandered a major taxpayer investment in a key sector, just so the government could meet a politically motivated budget target that, over a slightly longer time frame, it was on track to meet anyway.
But these are the kinds of decisions that can happen when you enforce a rigid balanced-budget policy. The Harper government forced this particular balanced budget on itself, but its proposed legislation would impose it on all future governments.
In his speech, Mr. Oliver talked about the value of fiscal discipline in providing governments with the flexibility to act when needed to stimulate the economy and protect Canadians from hardship, and he's right. It's a means to an end, not the end itself. If you start sacrificing that flexibility in the name of balanced budgets, you risk throwing away your best tools in order to protect the toolbox.