Now that the dust has settled on another federal election in Canada, the political parties of every stripe can set aside their overly optimistic platforms about what they would (or would not) do if they formed the government. Time for a big dose of realism — we’re heading for a fiscal deficit.

In Canada, and particularly in western Canada, the word deficit is anathema. After having found the religion of hard-fought surpluses in the mid-1990s, no federal party would dare suggest a deficit would be considered. Some provinces have gone a step further by making deficits illegal. To campaign on a platform of a small, responsible deficit would be political suicide. The phrase “responsible deficit” is apparently an oxymoron.

Why is it thus? What happened in Canada that voters and political parties alike are now so opposed to running even a small deficit? Is it healthy? Or does it unnecessarily hold the government back from properly steering the economy?

True story: One day, a not-so-young man realized that his weight had crept up over the years, and now his doctor was advising him to lose 25 pounds. He started a very disciplined eating and exercise program, and within four or five months, he had nearly reached his target weight. The doctor was very pleased with his accomplishment, particularly his level of commitment and discipline to his diet. He could even fit back into pants he wore in college.

Then one day, the newly trim man came across a bag of vanilla cream cookies. He rationalized that one cookie wouldn’t be such a bad thing. After all, he had worked so hard — it was time to reward himself, right? The cookie tasted good. Very, very good. How bad could a second cookie be? After inhaling the second cookie, the third and fourth cookies hardly seemed noticeable. Soon the entire bag was gone. And what started out as a well-deserved treat turned into a nasty episode of regret and stomach pain.

So it was with federal government deficits. Throughout the 1950s and 60s, Canada’s federal governments had done quite well controlling spending, running more-or-less balanced budgets. The first “cookie” came in fiscal year 1970-71, with a modest $1-billion deficit. That would not have been so bad except for the 28 other cookies that followed. It wasn’t until 1998 that the federal government posted another surplus. The federal government, in effect, ate the whole bag of vanilla cream cookies.

Deficit financing, if controlled, can be extremely helpful in managing difficult economic times. In the aftermath of the Second World War, fearing that depression would reemerge, Western governments adopted Keynesian economics — deficits in bad times, and surpluses to pay for the deficits in good times. Many federal and provincial government programs (such as employment insurance, social welfare, job training and other transfers to persons) are automatic stabilizers; payments under these programs automatically rise when the economy falls (and vice versa). Personal and corporate income taxes work in the same way, with less revenue flowing to the government in lean times.

As the US and Canada stumble toward what appears certain to be a recession, these automatic stabilizers will kick in, causing government spending to automatically rise and tax revenues to fall. For the federal government to maintain a balanced budget would require either additional spending cuts or tax increases — measures that would only make the recession worse.

A deficit is not so bad. Twenty-eight  consecutive deficits, however, are very bad. So bad, in fact, that no federal government wants to be labelled as the government that brought Canada back into the red ink.

But is it really responsible to forcefully cut spending and raise taxes during a recession, blindly balancing the budget at all costs, just to avoid a political black eye?

A truly responsible approach would be to allow a small deficit to help manage the national economy through the coming recession, accompanied by a solid plan to prevent the slippery slide down the deficit drain again.

For the dieting man in the example, this plan could be to take a cookie or two, and then put the bag away (or throw the rest of the bag in the trash, if that’s what it takes!). For the government, it could mean allowing a deficit, but bringing in special legislation that requires a balanced budget (or surplus) by the year in which GDP growth returns to normal.

Recessions are difficult times in which to govern, and fortunately Canada has been out of practice for a long while. Would Canadians really be so upset with deficit financing if it was matched with a plan preventing a flood of red ink? The alternative — a forced balanced budget — could be much worse.

Todd Hirsch
Todd Hirsch is the Calgary-based senior economist with ATB Financial and author of The Boiling Frog Dilemma: Saving Canada from Economic Decline.

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