Just say no (to deficits during good economic times)

When a political party pledges to run small, “manageable” deficits if elected, it almost always means it will go deeper into the red if it wins government.

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Opinion

Hey there, time traveller!
This article was published 02/10/2019 (1160 days ago), so information in it may no longer be current.

When a political party pledges to run small, “manageable” deficits if elected, it almost always means it will go deeper into the red if it wins government.

It’s human nature.

After all, as a government, if you get the blessing of the public to spend beyond your means, what’s a few billion more a year in overspending?

The problem is, it doesn’t usually end there. When those same politicians seek re-election, they often want permission to post even larger deficits. In some cases, they’ve abandoned the idea of balancing the books altogether, arguing perpetual deficit financing is acceptable, as long as the debt doesn’t exceed a certain percentage of the economy.

When governments are given permission to borrow money to pay for daily operating costs, they’ll do it every time. If they’re given the green light to increase those deficits, they’ll jump at the chance. There are few things governments love more than a licence to spend without limits. It’s a politician’s dream.

If they are re-elected on such a platform, look out — they will almost certainly exceed their deficit targets. Why wouldn’t they? The last time they did, they were returned to office.

When governments are given permission to borrow money to pay for daily operating costs, they’ll do it every time. If they’re given the green light to increase those deficits, they’ll jump at the chance. There are few things governments love more than a licence to spend without limits. It’s a politician’s dream.

Eventually, though, reality catches up. Bond rating agencies downgrade credit ratings, finance charges become unmanageable, and the size of the debt (as a percentage of the economy) reaches crisis levels. When that happens, government has no choice but to slash spending (as was done by the federal government in the mid-1990s). If it doesn’t, it faces insolvency.

Governments at both the federal and provincial levels have been faced with that reality in Canada. Saskatchewan nearly went bankrupt in the 1990s, and needed a federal bailout to survive after years of unsustainable spending.

Liberal Leader Justin Trudeau committed to balancing the books by 2019, but hasn't. (Ryan Remiorz / The Canadian Press)

When that happens — when governments are forced to cut funding for health care, education and other front-line services — it causes a great deal of pain for many people, especially the most vulnerable. Structural deficits come with a price.

It’s against this backdrop Canadians should assess the federal Liberal party’s plan to run perpetual deficits.

Liberal Leader Justin Trudeau pledged during the 2015 election his party would run “modest” deficits of no more than $10 billion a year. The Liberals committed to balancing the books by 2019. They reneged on those promises.

After inheriting a balanced budget from the previous government, they posted a deficit of $18 billion — during good economic times — in their first full year in office (2016-17). They have continued to run similar-sized deficits.

If they promised $10-billion deficits and a balanced budget by 2019 and came nowhere meeting that, where would they take $21-plus billion deficits with no commitment to balance the books at all?

Now the Liberals want permission to run even larger deficits. In their costed platform released over the weekend, the Liberals say they would post deficits of $27.4 billion in 2020-21 and $23.7 billion in 2021-22. That would be followed by deficits of $21.8 billion and $21 billion in the two subsequent years. They have no plan to balance the books in the near future.

If past behaviour is any indication, the Liberals would likely exceed those targets. And therein lies the danger: if they promised $10-billion deficits and a balanced budget by 2019 and came nowhere meeting that, where would they take $21-plus billion deficits with no commitment to balance the books at all?

Worse, what happens when Canada falls into recession and the revenue estimates the Liberals are relying on collapse? The deficit would spike. Government’s ability to use stimulus spending to cushion the blow of an economic downturn would be limited.

In the mid-1990s, federal debt-to-GDP hit 68 per cent. Government responded by slashing spending, including chopping transfers to the provinces.

The federal government is nowhere near that now. Its debt as a percentage of the economy is around 30 per cent and has been stable. But under a plan to increase the deficit, Canadians could be at risk of returning to the financial crisis of the 1990s in the case of a serious economic downturn.

One of the key benefits of a balanced budget is the ability to weather an economic storm. If a political party (including the Conservatives, who are also proposing multiple years of deficits, albeit smaller ones) is asking for permission to go deeper into deficit during good economic times, Canadians should respond with a resounding “no.”

tom.brodbeck@freepress.mb.ca

Tom Brodbeck

Tom Brodbeck
Columnist

Tom has been covering Manitoba politics since the early 1990s and joined the Winnipeg Free Press news team in 2019.

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