Janice MacKinnon is a professor at the University of Saskatchewan and former Saskatchewan finance minister.
An important debate in the current election is about the role of deficits in Canadian fiscal policy. The New Democratic Party and the Conservatives are committed to balancing the budget annually. The Liberals propose to fund infrastructure projects by running short-term deficits. The Liberal approach is new and has not been subjected to sufficient scrutiny. What, then, are the potential merits and problems with this approach?
There is merit to the idea that in a time of recession, when interest rates are low, going into deficit to finance strategic infrastructure could help to stimulate the economy and upgrade infrastructure that will, over the medium and long term, hold economic benefits. There are, however, underlying issues that require serious consideration.
First, is the spending that is being proposed in fact strategic infrastructure spending? That is, will the increased debt incurred to fund the proposed projects be offset by the long-term economic benefits of what is being built? Some proposed investments meet this criterion. For example, investments in urban transit that will help to address the congestion problems of our major cities will likely bring long-term economic benefits. What, on the other hand, about the social infrastructure investments that are being proposed? For example, is the recently announced plan to provide financial assistance to landlords to upgrade their rental properties a strategic infrastructure investment?
Second, what is the problem that the spending is trying to address? Assuming it is a slow-growth economy that needs to be kick-started to a higher level of growth, are the strategic investments large enough to achieve that goal? What happens if economic growth is still sluggish after three years of deficit spending? Rather than being a short-term problem related to economic cycles, the sluggish economic growth that Canada is experiencing might be symptomatic of a slow-growth economy that economists have warned will come with our aging population and low productivity. If this is true, then long-term solutions are required.
Especially important is the fact that Canada would be planning to run deficits for three years with the commitment to balance the budget at the end of that time. Much has been made of the economics of deficits: The argument is that in Canada's very sound fiscal situation, it matters little whether the government has a $10-billion deficit or a surplus. Even with deficits, Canada's debt relative to the size of its economy would be very low. From an economic perspective, that is true.
What has received less attention is the politics and history of deficits in Canada. The requirement to balance the budget imposes fiscal discipline on a government. It requires governments to control spending and work toward a bottom line that the public can easily understand. However, once the line is crossed into deficit, the fiscal discipline is relaxed and the danger is that short-term deficits slip easily into the longer-term variety.
Since the 1960s, governments of all political stripes have gone into deficit to address economic problems or provide benefits to people with the goal of returning to balanced budgets. However, once voters come to see deficits as acceptable and governments become accustomed to running them, the fiscal discipline of balanced budgets is gone and it is easier for governments to continue running deficits without political consequences.
Consider Saskatchewan, a province with a history of balanced budgets and low debt. In 1982, the newly elected Saskatchewan government went into deficit to help people struggling with high interest rates and to reduce taxes. Rather than short-term deficits, there were 10 straight deficit budgets, which plunged the province into a fiscal crisis. In 1991, when our government took power we had to make painful decisions to cut long-cherished programs and raise taxes to return the province to balanced budgets.
A more recent example is Ontario. In 2009, the Finance Minister stated that the budget laid out a plan to balance the budget by 2015-16. However, the 2015 budget projected a deficit of $8.5-billion and considerable slippage – until 2017-18 – on a planned return to balance.
The issue of whether to balance the budget annually or to run short-term deficits is important and merits serious debate. Much of the commentary has been focused on the economic rationale for running deficits. The problem in Canada has not been finding reasons for going into deficit; the problem has been finding ways of getting out of deficit and preventing short-term deficits from becoming long-term ones.