Balancing act

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This article was published 16/04/2016 (3458 days ago), so information in it may no longer be current.

“The commitment needs to be to grow the economy and the budget will balance itself.”

— Justin Trudeau, in a 2014 CPAC interview

The budget will balance itself.

The Harper Conservatives happily seized on Justin Trudeau’s 2014 line to lampoon the Liberal leader in an attack ad during their unsuccessful re-election bid last year.

But the statement — particularly the fuller version above — neatly encapsulates an economic view seemingly adopted by the Manitoba NDP and like-minded economists.

Under Greg Selinger, the New Democrats have pledged big bucks for infrastructure and stressed the importance of job training to stimulate the economy and bring in the tax dollars needed to eventually balance the books.

The Progressive Conservatives, led by Brian Pallister, are taking a more activist approach to slaying the deficit. They stress they will find savings in government, reduce waste and spend smarter — while putting more dollars in Manitobans’ hands through tax cuts — to achieve a balanced budget

The Liberals, meanwhile, have preached a mixture of fiscal discipline and stimulus in their approach to getting the books into the black.

The Free Press recently interviewed two local economists who shed some light on the NDP and PC approaches — and where their ideas originate.

The budget will balance itself

Canada had its highest debt-to-GDP (gross domestic product) ratio after the Second World War following years of massive deficit spending. But in the years between 1947 and 1972, the debt largely disappeared — to 22 per cent of GDP from more than 100 per cent, said University of Manitoba economist Robert Chernomas.

He said governments achieved this mainly by spending large amounts of money on “physical and social infrastructure,” such as roads and harbours, and education.

“It’s not that government deficits or debt are the problem. It’s what the government is spending (money) on,” Chernomas said. “If you spend it on the wrong things, you’re just going to incur more debt. If you spend it on the right things, you get lots of economic growth.”

That increased economic growth, in turn, generates more tax dollars that eventually allow governments to balance the books, he added.

Whether or not you’re a fan of Selinger’s surprise decision to hike the PST three years ago, Chernomas said his use of the tax dollars to boost infrastructure and training is a wise move. To use the language of the economist, infrastructure spending “creates the biggest (economic) multiplier effect — much bigger than (by) tax-cutting.”

He also argues the current provincial deficit is not so much the result of overspending but the effects of the recent recession and still relatively sluggish economy.

Spending cuts and slashing taxes won’t solve the problem, he said, pointing to high-tax, high-spending northern European countries, such as Norway and Sweden, as examples to follow. He said those countries have among the highest incomes in the world, along with high literacy and life-expectancy rates.

Chernomas noted the prime minister is incurring a deficit to finance his infrastructure spending and stimulus plan rather than raising corporate taxes, which are at historically low levels. He questioned whether Trudeau needed to incur the debt because Chernomas doubts higher corporate taxes would have had much of an effect on investment, noting the Canadian business class is sitting on $635 billion in uninvested funds.

If you’re cutting taxes, it takes longer to balance the books, he said.

The budget won’t balance itself

Pallister has said if elected, he would take a gradual approach to balancing the books but, unlike Selinger, he’s touting cost control as an important means of getting there. His party has repeatedly said the government, under the NDP, doesn’t have a revenue problem, it has a spending problem.

The PCs promise to give Manitobans a break on income taxes by raising the personal tax exemption by at least the rate of inflation each year and ending “bracket creep,” which occurs when tax brackets fail to account for inflationary increases in income. They vow to reverse the PST increase within their first term in office.

The thinking is if Manitobans have more disposable income, it will stimulate the economy — and they, not the government, are best at deciding how to spend their cash. The Tories reject a tax hike on high-income earners proposed by the NDP.

Pallister said he will reduce the increase in annual government spending by a percentage point. He has not guaranteed he will post a budget surplus during his first term in office.

“Balancing budgets is not the be all and end all of everything,” said John McCallum, an economist with the I.H. Asper School of Business at the University of Manitoba and a former chairman of Manitoba Hydro when the Tories were last in government. “What is the be-all and end-all financially is prudent financial practice and value for money spending. And you can’t run deficits that are substantial forever.”

Manitoba’s estimated deficit for the year just ended is $773 million; for next year, it’s projected to be $619 million.

What’s important to lenders, McCallum said, is “a sensible, credible plan on both the spending and tax side that will see you over time move sensibly and gradually and stably closer and closer to balancing.”

He called Pallister’s plan to reduce spending growth “a nice first step” towards balancing the province’s books. Done over a period of years, it will lead to progress, he said.

“There is some momentum that comes from getting in the habit of fiscal prudence,” McCallum said. First, you need to take “a small but clear step” and then “have the religion to stick to it.”

Cutting taxes is also important, he said, to attract investment and the entrepreneurs who create jobs.

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McCallum, who teaches master of business administration students, said he’s alarmed by the proposed NDP tax increase on high-income earners. Combined with federal hikes, it would send tax rates soaring above the 50 per cent mark for top earners.

“When you get to the point where you’re at a 54 per cent tax rate, gosh, would you risk it all at that rate?” McCallum said of entrepreneurs.

Unlike the left-leaning Chernomas, McCallum believes there is room for the province to reduce spending, and he is not as enamoured with infrastructure investment as the main way to slay the deficit.

“You’re in an alternative reality if you believe that infrastructure spending is going to take Manitoba out of the financial predicament that it’s in.”

larry.kusch@freepress.mb.ca