Yes to sound budgetary policy, no to balanced budget laws

Hey there, time traveller!
This article was published 08/03/2025 (248 days ago), so information in it may no longer be current.

Budget season is coming soon to Manitoba and low-tax advocacy groups, like the Canadian Taxpayers Federation, are calling for the restoration of the original stringent Balanced Budget Law (BBL) passed in 1995. Over the ensuing 30 years, the requirements for budgetary balance were gradually diminished.

Legislating a requirement to achieve balance of revenues and expenditures annually is meant to impose discipline on governments which for political reasons, critics allege, refuse to curb spending, allow deficits to increase, and fail to pay down accumulated debts which will be borne by future generations.

In an interconnected, turbulent and unpredictable world, budgetary planning has become far more challenging, as the current tariff war indicates. A budget developed for one fiscal year (April 1-March 30) is too long for some purposes and too short for others.

I favour sound budgetary policy, but requiring balance every year does not make sense. Rather, when governments face a recession or an emergency, they should run deficits, and during good times they should run surpluses. Ideally, over a number of years the combination of deficits and surpluses should be reasonably balanced.

BBLs are presented as a panacea for the problem of “fiscal sustainability”, which refers to the long term capacity of a government to sustain its current spending, tax and other policies without incurring onerous interest charges on debt and/or downgraded credit ratings which hike the costs of borrowing.

When interpreting sustainability, governments include economic, financial, social and political considerations. Each province must deal with its own economic and financial realities. Some will be more prepared to run a deficit whereas others will insist on restraint. In short, a strict BBL is more feasible in some provinces than in others.

Manitoba has an open, relatively small, less affluent, mixed economy in which the public sector plays a significant role in achieving stability, growth, economic opportunities and the quality of life. In this context the two main political parties diverge, more rhetorically than in practice, on fiscal sustainability.

The history of BBL in Manitoba is too tangled and detailed to be told in full here so an incomplete synopsis will have to suffice.

In 1993, Brian Pallister (then a junior minister in Gary Filmon’s PC government) introduced what was described as the most stringent BBL in the country. It provided for deductions of 20 per cent to ministerial salaries for the first time that a government ran an annual deficit. A second consecutive deficit would result in a 40 per cent cut. The law also provided limited exemptions from the balance requirement, created a Fiscal Stabilization Fund (to deal with revenue fluctuations), required a referendum before major tax (income and sales) increases, and required that a minimum amount of debt repayment occur annually.

In their 1999 election victory, the NDP promised to retain the BBL and under premier Gary Doer (1999-2009) the government delivered 10 deficit-free budgets. Partly in response to a global financial crisis that caused revenues to crash, the NDP government scaled back the BBL through amendments (too detailed to be described here) in 2008, 2010 and 2013. Under Doer’s successor, Greg Selinger, the government ran deficits from 2009 to 2016. A balanced budget was promised by 2016. To reach that goal, Selinger broke a promise not to increase the sales tax and did so without the required referendum. This unleashed voter fury and led to a resounding defeat for the party in the 2016 election.

In 2017 the new PC government led by premier Pallister passed a bill removing the requirement for an annual balanced budget. Instead, it legislated a target for deficit reduction from one fiscal year to the next. Still on the books, the existing BBL provides for a 20 per cent cut to cabinet salaries until progress on deficit reduction occurs. The harshness of that penalty is diminished by a provision for repayment to ministers when a balanced budget is achieved.

BBLs fail to recognize sufficiently that global forces like inflation and changes in labour markets are not under provincial government control. The requirement in the original Manitoba law for annual balances in combination with a referendum on tax increases (which still exists) was too restrictive, tempting governments to use budgetary gimmicks to evade its constraints.

Legislation can only do so much to achieve prudent financial decisions. Far more important is how much priority a premier and cabinet assign to a balanced budget compared to competing objectives like stimulating the economy and/or providing services to people in need.

Even without a BBL, governments have been known to make tough choices to restrain or cut spending. For example, Jean Chretien’s Liberal federal government turned three decades of deficits into a surplus by deep cuts to spending from 1994 to 1997.

The current context of a trade war underway and an economic downturn looming qualifies as an emergency which exempts the NDP government from the requirements of the BBL. It also means that the government will probably have to move its campaign promise of balance by 2027 to a later date.

Importantly, the existing BBL requires an annual budgetary statement explaining why a deficit has occurred and describing in general terms how and when it will be eliminated. This puts political pressure on the government to make tough budgetary choices, opens it to criticism and allows voters to act accordingly.

Paul G. Thomas is professor emeritus of Political Studies at the University of Manitoba.