Brian Lee CrowleyThe G-7's silence on deficits in its final communique following last month’s meeting is a powerful rejoinder to Ottawa's plan to bolster the Canadian economy through spending.

By Brian Lee Crowley and Sean Speer, June 3, 2016

Last week’s G7 meeting should give Prime Minister Trudeau ‎reason to reflect on his plan for deficit spending. He arrived in Japan determined to sell other leaders on the merits of budgetary deficits to grow the economy. But his peers weren’t buying. ‎The summit’s 14,000-word communiqué was silent on calls for more government spending.

Why? Most of the other G7 leaders know that a “growth-friendly” agenda can’t be written in red ink. This is a powerful rejoinder to the Trudeau government’s plan to bolster the Canadian economy through deficit spending.

Recall that, following the global recession in 2008–09, the G7 debated the right fiscal policy prescription to support economic growth. It was a rigorous exchange that was often characterized as a tension between growth and austerity. Headlines such as “The time for stimulus is over, long live fiscal austerity,” “The austerity delusion,” and “G7 officials seek to balance austerity, growth” reflected these competing views.

This is a powerful rejoinder to the Trudeau government’s plan to bolster the Canadian economy through deficit spending.

Deficit hawks contended that large-scale deficits and debt were weakening investor confidence and in turn dampening economic growth, and deficit reduction would kick-start the economy. The pro-stimulus crowd argued that growth remained weak and that curtailing government spending would stall the nascent recovery. The lexicon of “fiscal overhang” versus “fiscal drag” found its way into our political parlance.

Sean SpeerAnd then practical experience brought us clarity. The U.S. and the U.K. chose to focus on cutting their deficits (both reducing them by roughly two-thirds) and have been rewarded with the fastest-growing economies among G7 countries.

Consider that the U.S. government cut nominal spending in 2012 and 2013 — the first time it has seen two consecutive years of declining government spending since the 1950s — and yet its GDP grew faster and its unemployment rate fell more quickly in the 18 months after the “budget sequester” went into effect than it did in the preceding 18 months.

The naysayers were wrong. They misinterpreted the extent to which deficits and debt were creating harmful economic uncertainty. Today’s deficit is tomorrow’s tax hike and enacting plans to bring deficits under control sent a powerful signal to businesses and investors that the market and policy environment was stable.

Both the U.S. and U.K. have remaining work to do to balance their budgets, but their experience thus far is an expression of what has been called “expansionary austerity” — the idea that cutting spending and reducing deficits can provide a significant boost to the economy. It’s proven once again that sound public finances are a critical ingredient to a pro-growth agenda.

Claims that so-called “austerity” represents a threat to growth were thus mostly abandoned and governments — including those led by centre-left parties (such as the Obama administration) — have generally put forward credible fiscal reforms. The spirit of the fiscal targets set at the 2010 G20 summit in Toronto has prevailed.

Trudeau sought to “promote deficit-backed growth” at the G7 meeting. Yet the other leaders didn’t buy it.

The Trudeau government has been a notable outlier. It came to office arguing that its predecessor’s focus on eliminating the deficit was wrongheaded, even though Canada had reclaimed all of the jobs and lost output from the recession, and did so faster than any other G7 country. The Liberals offered a different vision. Their budget seeks to rehash old debates by asserting that a “country can’t cut its way to prosperity” and purporting to focus on “growth, not austerity.” Ottawa’s deficit spending — nearly $120 billion and counting over the next handful of years — is thus presented as a “new approach.”

Trudeau sought to “promote deficit-backed growth” at the G7 meeting. Yet the other leaders didn’t buy it. Many of them were present for the previous debate about growth versus austerity and saw first-hand the positive effects of curbing spending and reducing deficits. There was no appetite for re-litigating the old arguments in the face of compelling evidence.

Not only can the G7’s silence be characterized as a policy rebuke, it also has practical implications for the government’s fiscal plan. Expansionary fiscal stimulus requires international co-ordination, like that following the financial crisis, for it to have utility. Unilateral stimulus spending is bound to have a marginal impact on the open Canadian economy, with much of the impact leaking away to our trading partners. The result will be more deficits and debt with little to show for it in the way of real stimulus.

The Trudeau government’s commitment to evidence-based policy ought to extend to public spending. The G7 was right to balk at its calls for bigger deficits. The evidence points in a different direction.

Brian Lee Crowley is the managing director and Sean Speer is a senior fellow at the Macdonald-Laurier Institute.

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