No More Federal Deficits

[c9]

I don't know enough to know if this is actually a good thing, but I think it's a good thing. The federal government will be introducing legislation to require balanced federal budgets. Since 1997, it's been required by the PMO, but not actually legislated.

Certainly in cases of national emergency a deficit is understandable, and in cases of major upheaval / investment it might be warranted (like buying a house and carrying a mortgage), but getting us officially out of the habit of deficits seems like the right thing to do. We ought to spend what we have, not what we wish we had.

The National Post has more details.

Comments

[leapfish.livejournal.com]

I can think of one very specific instance in which carrying less debt translates into direct fiscal responsibility on behalf of our government.

Right now, Alberta is the only debt-free province. Also, Alberta provides the lowest spread on their provincial bonds (kind of like Canada Savings Bonds, but issued by the provinces - they all do it - even some cities issue their own bonds). Bonds are issued in order to raise capital, so that the governments can continue to operate. Sometimes taxation isn't enough, so they have to borrow money from private purses in order to finance their projects. The higher the debt that a province carries, the more risk there is that the province will default on their debt (ie: not be able to repay it) and investors require a higher rate of return (ie: a greater spread above the risk-free rate, in investment jargon) in order to compensate for the greater risk they're taking.

So by being able to finance debt at a lower rate, that's less money that the province has to pay back in the future.

Being low-risk supposedly attracts more business, which then allows for a greater tax base, which would eventually benefit us all.

It all sounds very capitalist, but I think it's a very socialist policy, idealistically speaking. More business means more taxes can be collected. Lower unemployment. More money for health care. Same thing with having to pay less debt in the future (or at a lower rate). More money becomes available for social spending.

How utopic!

Having less debt conversely means having more money, and more money is mo' problems. Alberta isn't exactly scandal-free in their provincial affairs.

But still, when choosing the lesser of two evils...go with the debt-free strategy.

[c9.livejournal.com]

Woo! That helps it make even more sense, thanks Mister!

[jdhorner.livejournal.com]

also, though, don't confuse debt with deficit spending.
same forest, two totally different animals.

debt is a Bad Thing™ whereas deficit spending isn't always such a black sheep.

[c9.livejournal.com]

Absolutely, that is a common mistake. But deficit spending, long term, got us where we are today, and will drag the US down very soon, it seems.

What I worry about is another government that thinks $40B per year in deficit spending is just dandy, multiplied by 2 majority terms.

[jdhorner.livejournal.com]

and now that i think about it, did i get this completely wrong?

is it Debt that's OK, but deficit spending that's the bad apple?

i remember studying both, at length, in an Econ. class, but i forget it all now.

i think i -was- wrong the first time. having debt is OK, as long as it's managed... it's spending more than you actually have that's bad (e.g. no balanced budget).

argh. i miss econ.

[c9.livejournal.com]

Deficit is the shortfall in a given year. Debt is the accumulated shortfalls over time. So both have bad elements, but deficit spending is the worst because you're making the debt worse, which increases your interest payments, which increases your deficits... etc.

Even when Canada hit $42B deficits, it was *all* interest payments on the debt, not actual deficit-spending-on-programs.

[jdhorner.livejournal.com]

thanks.

[nihilicious.livejournal.com]

I have a few problems with balanced-budget legislation.

First, it becomes an exercise in smoke & mirrors to some extent. The government is already creative in the way it presents information about its budgets. With balanced-budget legislation, there is even greater incentive to take liberties with the facts.

Second, it excuses a failure in political leadership. Managing the economy means making hard choices about spending, and I think politicians like balanced-budget legislation because it provides a scapegoat. "I'd like to spend more, but that gosh-darned legislation won't let me." My direct experience with this is in Nova Scotia, arguing for increases in public sector salaries. The government's argument was that it could only afford so much of an increase because anything else would violate the balanced budget legislation. Our argument, of course, was that that was bullshit--just rearrange your priorites as to where you spend your money. Unfortunately at the end of the day, I think the government's argument carried much more weight than it should have.

Thirdly, and I'm not an economist, but it just makes sense to me that depending on how the economy goes, you will have good years and bad years. I don't think running a deficit occasionally (emergenies or not) is really the be-all-and-end-all of good governance. To me, it seems logical that some years you may spend more in order to improve the economy in the longer term. At the very least, I don't know why the government would want to shut down even the option that a non-balanced budget might make sense in any given year. I think Linda McQuaig makes some good arguments that our governments' obsession with deficit reduction hurts us as much as it helps us. (Not that deficit reduction is a bad thing, but just not at any cost.)

Fourthly, and maybe related to my second and third points, it creates the impression that the success of a government can be measured in dollars and cents alone. I'm not encouraging fiscal irresponsibility, but it's not the only thing we should be concerned about. Balanced budget legislation is a victory of neo-liberal thinkers over those who would measure our national well-being in a more thoughtful manner.

And, I guess those are my thoughts.

[c9.livejournal.com]

All very good points.

1. This is one of my biggest pet peeves about financial reporting, both private and public sector. GAAP (Generally Agreed Accounting Principles) and even stricter requirements should be law as to how money is accounted for. The smoke and mirrors are a huge problem.

2. True, laws are often used as scapegoats and excuses. But there are lots of scapegoats and excuses now, so I don't know that this will actually materially alter the landscape.

3. I think that when deficits first appeared in government budgets, that was the idea: some good years, some bad years. But governments stopped understanding that balancing act, and the idea of financial cycles, and instead deficits got bigger and bigger and bigger with Trudeau and Mulroney both growing the country and growing the debt. I am somewhat partial to the idea of balanced budgets across a financial cycle, or a legislative mandate, rather than annually. But I can see it being abused too. To be honest, I don't see an obsession with debt reduction. We've gone from almost $600 billion in the mid nineties to almost $520 billion today -- our debt charges are still measured in the tens of billions of dollars that could be going to social programs too.

My angle on it would be that we could buy $2 billion in affordable housing today, or put it on the debt and free up tens of billions of dollars over the next 50 years, paying for much more including the housing. The downside of course is waiting for it.

4. Very true. Governing is always a battle of wits and a war of definitions. One benefit is that actual dollars, subject to #1 above, can't be redefined as easily. Hopelessly naive, I know.