Deficit battle lines a question of government’s economic role

theglobeandmail.com
Sept. 3, 2015
By David Parkinson

Stephen Harper and Justin Trudeau have drawn their battle lines on the question of budget deficits, but it’s wildly oversimplistic to view this as one - Mr. Harper - being firmly committed to balanced budgets and the other - Mr. Trudeau - being soft on them. They both see the high value of the “fiscal dividend” that comes from balanced budgets. Where they fundamentally part is on how to use that dividend.

This may well have become the key issue around which the current federal election campaign will be framed, as Mr. Trudeau came out last week with a bold and risky economic plan built on doubling the government’s spending on infrastructure, and a willingness to run budget deficits of “less than $10-billion” a year over the next two years before bringing the budget into balance by 2019.

While Mr. Harper remains steadfastly committed to a balanced budget in the current fiscal year and beyond, Mr. Trudeau is proposing to invest a little more in the short term to help spur productivity and accelerate economic growth in future years.

While there is now a very clear dividing line between the messages of these two opponents, what Mr. Trudeau is proposing actually isn’t much different from what Mr. Harper has been doing all along. His government has spent years pledging to bring the budget into balance while running seven consecutive years of deficits totalling nearly $150-billion. (And it could be well on its way to an eighth, as this year’s sluggish economy jeopardizes the small surplus the government projected for 2015-16.)

Much of the Harper deficit streak came from the hefty stimulus spending in the financial crisis and Great Recession, as governments throughout the industrialized world took extreme spending measures to ward off an even more disastrous economic downturn.

Since the crisis passed, the government has been whittling away at the deficit, while recognizing that it didn’t want to cut too deeply and quickly lest it pull the rug out from under a very wobbly economic recovery.

Mr. Harper may talk a tough line on deficits as being ideologically offensive on their face, but he’s acted much more the Keynesian pragmatist than he’d like to admit.

In practice, his philosophy hasn’t been “balanced budgets all the time,” but rather “balanced budgets over time” - understanding that there are times when a government must lean against an economic slowdown with deficit budgets. This is really no different than the thinking on which Mr. Trudeau’s economic plan is built; both men are headed toward balanced budgets, it’s more a question of timing.

But the big divide comes in the philosophy behind why a government would seek budget balances in the first place. And for both, it’s not just a question of “living within your means,” as politicians like to say when trying to relate such complicated issues to us common folks who are only familiar with paying our monthly bills.

If a balanced budget is a means to an end (and I’d prefer to think that it is, rather than some sort of moralistic end in itself), then for the Harper Conservatives, that end has always been smaller government. If you keep yourself in balance, you can hand surpluses back to voters in the form of tax cuts. If you thus shrink the tax base, you can keep a lid on the relative size of the government.

For the J. Trudeau Liberals, however, a balanced budget is a means to finance government investment. The fiscal health, strong credit rating and low borrowing costs that stem from the balance give the government the wherewithal to borrow, moderately and responsibly, to fund the country’s long-neglected infrastructure needs.

For them, balanced budgets and fiscal health should be leveraged for the national good, not handed back as a dividend to the taxpayers.

In talking about the short-term budget deficits in the range of $10-billion that the Liberal plan proposes, some perspective is needed. That’s just 0.5 per cent of the country’s gross domestic product and roughly 3 per cent of Ottawa’s annual budget.

It’s also about the same amount, as coincidence would have it, by which the Conservatives’ last budget projected that federal government revenue will grow in each of the next two years. And it’s smaller than the average deficit the Harper government has run since the previous election.

And it’s important to recognize that if your goal is long-term infrastructure development, that’s a spending priority that can, and probably should, be financed with long-term debt. (No less an authority than David Dodge, the former Bank of Canada governor, who as deputy finance minister was instrumental in helping the Chretien Liberals balance the federal budget, has advocated this.)

And debt is not the same thing as deficit, despite some politicians’ penchant for using the two terms interchangeably; at low interest rates, you can pay for a lot of long-term projects with relatively modest spending on debt payments.

The Liberals would argue that this is the benefit of all the hard work that past governments (mostly Liberal ones) have done to make balanced budgets in Canada a realistic goal; with the federal debt-to-GDP ratio in decline and the country enjoying a stellar credit rating, we have the room and the opportunity to borrow to invest in a long-neglected national need.

But bigger spending and bigger debts and bigger projects imply bigger government, and that’s not in the Conservatives’ vocabulary. It’s ultimately not a question of responsibility versus recklessness, or of economic management skills. It’s a bigger question of what you believe the government’s role in the economy should be.