Rarely, if ever, was deficit spending viewed as an end in itself, writes Speer in the Province.

By Sean Speer, March 20, 2018

What’s common between Ottawa’s budget last month and Queen’s Park’s upcoming budget later this month?

Both governments have thrown out conventional fiscal playbooks and are deliberately choosing to run budgetary deficits.

The latter is explicit about its fiscal choices. The former is cagier about what’s behind its budget gap. But the outcome is the same: deficits are rising even though the economy is performing reasonably well.

It’s an odd fiscal strategy. Previously governments incurred deficits due to unanticipated circumstances (such as wars or natural disasters) or poor economic conditions (such as the 2008/09 global recession) or even ambitious national projects (such as Confederation-era railroads).

Rarely, if ever, was deficit spending viewed as an end in itself. Few governments talked about deliberately spending more than they could afford as a goal in either good times or bad.

Yet that’s what we have now. Deficits for deficits’ sake seem to be the stated fiscal policies in Ottawa and Queen’s Park. Failing to bring revenues and outlays into balance is now a virtue rather than a vice.

There are various factors that have contributed to this recent political preference for deficits.

But, it’s important to recognize that this is principally about politics as the C.D. Howe Institute’s Bill Robson has pointed out. There’s little economic basis for running deliberate deficits in the current economic context.

Start with Ottawa. The federal budget boasts that the economy is growing — including 3% growth in the past year — and yet its year-over-year deficit is actually rising on the account of considerable, new spending.

Higher spending and in turn rising budgetary deficits seems to be the government’s default fiscal policy irrespective of the circumstances or even the efficacy of current expenditures. Recent reports are that Ottawa’s efforts to find “inefficiencies” have actually led to new spending.

This doesn’t accord with most public finance thinking. While there’s ongoing debate among economists about the utility and efficacy of fiscal stimulus during deep economic recessions, there’s little mainstream support for rising deficits in periods of economic growth — especially when it’s disconnected from any extenuating circumstances.

It’s even more counter-intuitive when one considers that Ottawa’s deficit is up in 2017-18 at 3% growth but then is slated to fall in subsequent years as economic projections decline slightly. What’s the logic behind such a policy?

The risk, of course, is that deficit spending persists. It’s a natural consequence of divorcing fiscal policy from economic theory or the business cycle or other typical considerations. Deficits invariably become the natural order of things.

Which brings us to Queen’s Park. The government has just run deficits for a decade. The resulting run up in debt has been significant — in fact, the Parliamentary Budget Office recently highlighted the province’s long-term fiscal unsustainability.

But it was to be on a different track now. The deficit was eliminated. A new, more disciplined fiscal policy was to take shape, as finance minister Charles Sousa set out in his November Economic and Fiscal Outlook.

It didn’t last long. Now, just over 100 days later, the minister has announced his intention to return to deficit spending. He attributes it to the province’s “strengthened fiscal position” which overlooks that overall debt levels continue to rise and its debt-to-GDP ratio has barely budged. It hardly seems justification to plunge back into deficit after a one-year hiatus.

Deficits should be extraordinary rather than ordinary. But, in Ottawa and at Queen’s Park they’ve become far too familiar — and deliberate. It’s time to dust off the old fiscal playbook.

Sean Speer is a Munk Senior Fellow at the Macdonald-Laurier Institute.

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