Skip to main content
The Globe and Mail
Support Quality Journalism.
The Globe and Mail
First Access to Latest
Investment News
Collection of curated
e-books and guides
Inform your decisions via
Globe Investor Tools
Just$1.99
per week
for first 24 weeks

Enjoy unlimited digital access
Enjoy Unlimited Digital Access
Get full access to globeandmail.com
Just $1.99 per week for the first 24 weeks
Just $1.99 per week for the first 24 weeks
var select={root:".js-sub-pencil",control:".js-sub-pencil-control",open:"o-sub-pencil--open",closed:"o-sub-pencil--closed"},dom={},allowExpand=!0;function pencilInit(o){var e=arguments.length>1&&void 0!==arguments[1]&&arguments[1];select.root=o,dom.root=document.querySelector(select.root),dom.root&&(dom.control=document.querySelector(select.control),dom.control.addEventListener("click",onToggleClicked),setPanelState(e),window.addEventListener("scroll",onWindowScroll),dom.root.removeAttribute("hidden"))}function isPanelOpen(){return dom.root.classList.contains(select.open)}function setPanelState(o){dom.root.classList[o?"add":"remove"](select.open),dom.root.classList[o?"remove":"add"](select.closed),dom.control.setAttribute("aria-expanded",o)}function onToggleClicked(){var l=!isPanelOpen();setPanelState(l)}function onWindowScroll(){window.requestAnimationFrame(function() {var l=isPanelOpen(),n=0===(document.body.scrollTop||document.documentElement.scrollTop);n||l||!allowExpand?n&&l&&(allowExpand=!0,setPanelState(!1)):(allowExpand=!1,setPanelState(!0))});}pencilInit(".js-sub-pencil",!1); // via darwin-bg var slideIndex = 0; carousel(); function carousel() { var i; var x = document.getElementsByClassName("subs_valueprop"); for (i = 0; i < x.length; i++) { x[i].style.display = "none"; } slideIndex++; if (slideIndex> x.length) { slideIndex = 1; } x[slideIndex - 1].style.display = "block"; setTimeout(carousel, 2500); } //

The balanced budget legislation introduced as part of the federal budget is based on dubious economic principles that should raise the eyebrows of even fiscally conservative economists.

Bill C-59 requires the federal government to balance the budget and reduce debt each year except when there is a recession or emergency. It imposes significant sanctions on ministers and deputy ministers if this is not the case. The preamble to the bill states that a balanced budget is crucial to economic growth and job creation over the longer term.

Times of recession and emergency are fortunately the exception rather than the rule, so balanced budgets would become the norm. Under such a scenario, the federal public debt would shrink rapidly as a share of the economy from an already very low level compared with other advanced economies.

Story continues below advertisement

The International Monetary Fund and Canada's Parliamentary Budget Officer argue that it makes more sense to stabilize debt as a share of the economy than to reduce it every year outside emergencies. Very few economists argue that the debt should be zero.

Federal government bonds are an important asset for savers, particularly institutional investors. Pension funds in particular need low-risk, long-term government bonds to safely match long-term assets and liabilities.

Federal bonds are an important asset for the financial system as a whole because they are almost completely risk-free. The government will never default so long as the Bank of Canada is there to backstop the market.

While the federal debt will never be allowed to fall to zero, problems may emerge in the bond market as the outstanding debt shrinks well below the current debt reduction target. A healthy bond market requires a minimum level of volume and new bond issues to satisfy demand and maintain liquidity.

There is a close link between the government bond market and the conduct of monetary policy, particularly when it comes to influencing longer-term interest rates. While the Bank of Canada has not engaged in so-called quantitative easing, other central banks such as the U.S. Federal Reserve and the European Central Bank have intervened in the secondary market for public debt to speed economic recovery.

Further, economists draw a distinction between government borrowing to finance current spending on programs and services, which should normally be balanced by revenues, and borrowing on the capital account to finance investment in long-term assets, which should be amortized over many years.

The federal government can still amortize some investments over the life of an asset, such as a federal bridge, but it must account immediately for the full cost of a transfer to the cities or provinces to build needed public infrastructure.

Story continues below advertisement

Given a very large infrastructure deficit, the known benefits to the private sector of infrastructure investment and very low interest rates, we should not let a balanced budget law get in the way of significantly increasing federal capital investments.

The requirement to always balance the budget outside recessions is also foolish when it comes to the pursuit of short-term macro-economic policy. There are three major sectors of the economy – corporations, households and governments – and all three cannot be saving at the same time unless we want to be net lenders to the rest of the world.

Given that Canadian corporations are large net savers today and that households are already holding very high levels of debt, a series of budget surpluses is likely to condemn us to very slow growth and job creation. The IMF and many others have argued that a balanced budget is not optimal until business investment starts to rise and begins to make a significant claim on savings.

Balanced budgets sound appealing to many voters, but legislation to balance the books each and every year is poor economics.

Andrew Jackson is senior policy adviser at the Broadbent Institute and an adjunct research professor in the Institute of Political Economy at Carleton University.

Your Globe

Build your personal news feed

  1. Follow topics and authors relevant to your reading interests.
  2. Check your Following feed daily, and never miss an article. Access your Following feed from your account menu at the top right corner of every page.

Follow topics related to this article:

View more suggestions in Following Read more about following topics and authors
Report an error Editorial code of conduct
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

If you do not see your comment posted immediately, it is being reviewed by the moderation team and may appear shortly, generally within an hour.

We aim to have all comments reviewed in a timely manner.

Comments that violate our community guidelines will not be posted.

Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies