Brian Lee CrowleyWhy do we regulate bank spending and not government budgeting?

Brian Lee Crowley and Sean Speer, writing in the Sun Chain of newspapers, make the case for a new way of thinking about government deficits.

By Brian Lee Crowley and Sean Speer, April 12, 2016

Talk about government borrowing and someone will invariably compare it to household spending. Critics draw parallels to buying groceries with a credit card. Defenders of public borrowing draw links to long-term investments such as residential mortgages.

Just because there are similarities between government and household budgeting doesn’t mean we should overreach. We need a new analogy.

Critics of public borrowing are correct that governments, like households, can find it difficult to resist paying for current consumption (consider a family vacation or civil service salaries) not just out of present income but through debt financing. It’s how we end up with 2.2 credit cards per Canadian and only a small share of new federal spending on long-term infrastructure.

Yet debt financing can make sense for governments and households. Few households have the resources to purchase a house with cash and debt allows government to make present and future beneficiaries pay for productive investments.

Excessive borrowing by governments and households can crowd out other priorities due to rising interest payments. The result is that both can be forced to “live below their means” because once a dollar is spent, it’s gone, and that’s just as true for a dollar spent on interest payments as on anything else. Consider, for instance, that the Ontario government’s interest payments are now its fastest-growing expenses.

Sean SpeerBut like all analogies, this one has its limitations. Household financial planning is limited to one’s lifetime. Government budgeting goes on forever.

Household borrowing capacity is finite. Government’s is vast because the state has broad taxation powers and the ability to print money.

A household’s borrowing is measured as a share of its annual income. Government debt is typically expressed as share of total economy. These key differences are frequently overlooked.

A more apt analogy may be between governments and banks. Both are large, have greater financing capacity than households, and play indispensable roles in the economy.

Consider that excessive debt accumulation for a household affects the borrower but not the broader economy. If someone wants to rack up his or her credit card on lottery tickets or casino gambling, it won’t cause financial contagion. The same cannot be said for irresponsible spending and debt accumulation by governments and banks. Just think of the Greek government or Lehman Brothers.

So why do we regulate bank spending and not government budgeting?

What’s the key takeaway from our new analogy? A greater emphasis on rules-based budgeting.

Canada’s banks fared relatively well during the global financial crisis because of the country’s solid regulatory policy that required they be properly capitalized and refrain from excessive risk-taking.

So why do we regulate bank spending and not government budgeting?

Smart regulation ought to be extended to fiscal policy. Fiscal rules – such as stringent balanced budget legislation – would preclude governments from irresponsible spending, excessive borrowing, and systemic risk. It would make clear the baseline assumption is government should refrain from spending beyond its means simply because it can.

The Trudeau government is committed to stronger banking regulations and repealing the Balanced Budget Act. One decision protects against irresponsible private spending. The other allows for irresponsible public spending. Both pose a serious risk to the long-term health of the economy. Recognizing the similarities between the government and banks may cause Ottawa to revisit its thinking. Here’s to a new analogy and better policy.

Brian Lee Crowley is Managing Director and Sean Speer is a Senior Fellow at the Macdonald-Laurier Institute

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