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‌Colby Badhwar 🇨🇦🇬🇧 (Twitter)

RT @Sean_Speer: The virtue of balanced budgets

During the 2015 federal election campaign, I was working in the Conservative Party’s national campaign headquarters doing odd jobs related to public policy.

When the Liberal Party released its own policy platform which anticipated returning the federal government backed in deficit, I contacted various economists, think-tank scholars, and others to see if they intended to criticize the Liberals’ plan to abandon balanced budgets. I got a rather lukewarm response.

Most of those who I spoke to were generally dismissive. They weren’t necessarily supportive of deficits but they weren’t too fussed either.

You heard comments like “a 1 percent of GDP deficit is effectively a balanced budget” or “deficit spending of that magnitude is sustainable indefinitely” or “a balanced budget is an arbitrary fiscal target.”

Those of us who had worked in the Harper government to balance the budget after the global financial crisis were a bit less non-plussed. We knew how challenging it was to sustain budgetary discipline in a world of unlimited demands on government finances. Budgets just don’t balance themselves as Justin Trudeau claimed during that campaign.

It didn’t taken long of course for the Trudeau government’s plan for modest, short-term deficits to become bigger and more structural. Thirty billion in accumulated deficits has become more like $550 billion and counting.

Now nearly ten years later, many of those economists and fiscal policy experts who I spoke to during the 2015 election are increasingly critical of the government’s deficits and debt.

They may have been right that balanced budgets—the precise goal of “zero”—is arbitrary as a matter of public finance theory. But they underestimated how much it matters in practice.

Once a government jettisons it, alternative fiscal anchors come to seem even more arbitrary. And then something unexpected like a pandemic or a recession invariably happens. Soon the government’s fiscal policy is completely unmoored.

This is the story of the Trudeau government’s fiscal policy. We still don’t even know its final fiscal results for last year but there’s now growing speculation that they were worse than the projected $40 billion deficit. The current year is no better. Eight months into the fiscal year and the government has already nearly spent what it projected for the full year. And that was before this year’s HST/GST cut and rebate cheques which will cost something like $6 or 7 billion.

The key point is that more than a half decade since when the Trudeau government’s temporary three-year deficits were supposed to end, we’re actually seeing its deficit spending get larger and longer as Stephen Harper anticipated during the 2015 election campaign.

The whole experience is a powerful reminder of the utility of balanced budgets as a limiting principle for fiscal policy. Although their importance can be overstated as a matter of public finance, we’ve relearned during the Trudeau years that they can be understated as a matter of political economy.

At least most of us have relearned this point. It’s fair to say that Prime Minister Trudeau, Finance Minister Freeland, and the people around them haven’t. And that among other issues may ultimately be a key source of the government’s undoing.

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