Mon, Oct
20
2008

I'd Run a Deficit

Mon, Oct 20, 2008

As we look ahead to some potentially troubled economic waters, our political leaders seem adamant about one thing: they will not, ever, run a deficit.

Which is unfortunate. Because, as we saw with the rather anaemic platform released by the Conservatives this election, the fact is that with our financial situation pretty tight, and with the economy on shaky ground, the options for changing the economic picture without going into deficit seem slim indeed. Indeed, Harper has to leave open the possibility of running a deficit if his planned tax cuts don’t generate the relief they need, and more cuts are needed.

I can understand why Canadians of all political stripes would be loathe to re-enter deficit spending. Our federal deficit was an albatross around our necks throughout the seventies and eighties, and its departure in 1997 was a great point of pride. We were one of the first G8 nations in surplus; we beat the United States to that milestone. And as the United States’ fiscal picture tanked, we have continued to pay down our debt.

But if I were a political leader, I’d be suggesting deficit spending at this point as well, political suicide though it might be. For one thing, it may be unavoidable. The various parties’ fiscal plans are based upon continuing economic growth. That doesn’t happen during a recession, which means revenues are going to go down, and costs are going to go up. And what costs are going up? A fair chunk of it at the federal level will be laid-off workers collecting employment insurance. There’s no way to cut these additional costs without cutting key elements of our social safety net at the precise moment when Canadians everywhere need that net the most.

Since a deficit is a distinct possibility, I’d plan for it. I’d leave open the possibility that the government may have to spend upwards of $10 billion more than it takes in each year, for the next three years. Only when costs for current programs exceed that level would I start to make substantial cuts.

And I’d even go further. To try and reduce the pain of the coming recession, I’d commit to spending an additional $5-10 billion each year over the next three years to stimulate the economy. These investments would be targeted toward addressing the infrastructure deficit, repairing roads and bridges, expanding broadband capacity, and possibly bulking up our rail network (maybe an Edmonton-Calgary and Toronto-Montreal TGV) to reduce dependence on oil (meaning, more to export). Not only do these investments create jobs in the short term, they address the growing issue of infrastructure decay that will cost us jobs in the long term.

People say that the deficits of the seventies and eighties disproved the Keynesian notion that a government should go into deficit to smooth over cyclical declines in the national economy. I disagree. The deficits of the seventies and the eighties showed that you could not apply the Keynesian notion to an economy undergoing a structural change. What happened during those twenty years wasn’t a cyclical problem, it was our economy moving from a low-skill manufacturing base to a high-skill information base.

Stephen Harper says, the fundamentals of our economy are strong, and he’s right — even the dour economists at Scotiabank agree with him — and it’s more than likely that we will have recovered from this downturn within three years and could be in surplus again if we keep a firm hand on the tiller. So, we won’t have added to our debt to an unsustainable degree, and what money we do spend outside of maintaining current programs would be spent to bulk up our infrastructure so that it is better able to accept the next structural changes in our economy, ensuring future prosperity when it comes, for years to come.

The Bush Administration may have disproved the Reaganite notion that “deficits don’t matter”. They do. But that doesn’t mean they don’t help.


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