In
my previous post, I noted that government debts and
deficits do matter. Christians
should support those who take seriously the reduction of deficits. That,
however, does not mean that we should seek to have the governments’ budget balanced
every year.
Business Cycles and government Finances
Our
striving for balanced government finances must take account of the Business
Cycle.
While business cycles may vary in length and
severity, good economic (boom) times will invariably end and be replaced at
some time with bad times (recession/depression). Those, however, will also pass
and, eventually, make room for better times. The most recent example of this
cycle has been the “great recession” beginning in 2008 from which we are only
slowly emerging. To seek to keep the budget balanced throughout an economic
cycle would be counter-productive. Rather, we should strive to balance the
budget over a business cycle.
Suppose
the government’s tax revenues were equal to its expenditures (in balance) at
the peak of an economic cycle (left of the diagram). If the economy, then, goes
into a downturn, government finances automatically go into deficit. People buy
less when they lose their jobs or face the prospect of that possibility.
Business sales go down; profits decrease; business income tax payments go down.
Similarly, when people lose their jobs and lose income, less personal income
tax is paid. As people spend less, sales tax receipts go down. Thus, government
revenues decrease. In addition, royalty income from resource production—oil,
gas and mining—will go down. At the same time, expenditures go up automatically
because employment insurance benefits and additional social services have to be
paid. The government goes into deficit if it takes no new action. These effects, which economists call "automatic stabilizers", are a "good thing". Without them, the recession would be worse!
If
the budget is to be balanced at all times, the government would have increase
taxes and/or decrease its spending. However, in a period of recession, that is
exactly the opposite of what is needed! Increased business taxes would cause
further job losses as some production becomes unprofitable and businesses reduce
new investment even more than the bad economic outlook has already caused them
to do. Similarly, increases in personal taxes will reduce consumption even
further and those lost sales will further add to unemployment. In fact, most
governments will, in recessionary period, increase government spending on
infrastructure such as roads, to stimulate the economy and fight the rise in
unemployment.
Balanced Budget Legislation
- Deficits only in response to a recession or "extraordinary circumstance, that, is war or natural disaster, with a cost exceeding $3 billion in a year."
- A requirement for the finance minister to testify before the Commons finance committee within 30 days of a published deficit to present a plan and "concrete timelines" to return to balanced budgets.
- A freeze on operating spending and a five per cent wage freeze for cabinet ministers and deputy ministers, following a published deficit.
As could be expected, a recent
Canadian study found that balanced-budget laws were no match for the Great
Recession. Many provinces simply suspended their legislation to allow for
deficits. The report’s authors conclude that, for the most part,
balanced-budget laws in Canada have failed to live up to expectations. “It
seems clear that, like any other piece of legislation, BBL is only as strong as
the political will and public support underlying it,” they say[1].
Moreover, any subsequent Parliament can simply abolish the legislation or
simply ignore it.
In fact, as we noted, BBL cannot
work without loopholes. Our goal should not be to balance the budget each and every year. Rather,
it should be balanced over a business cycle. That is in periods of prosperity,
we should be running surpluses and, during economic downturns, we can accept
deficits. If we had no debt, the total of the surpluses should equal the total
of the deficits. Unfortunately, that is not easy. No one can forecast the
length of a recession and the following recovery. Economics cycles don’t look
like the stylized diagram I drew above. Consequently, we should err on the cautious side
and run significant surpluses and pay down debt during prosperity and keep our
deficits as small as possible during recessions. That is all the more, the
case, when we already have significant government debt!
Focus on the Debt
In fact, economist Jock Finlayson,
chief policy officer at the Business Council of British Columbia, argues that
governments should concentrate more on public debt than the accounting of any
particular year[2].
It is accumulative debt, not deficits, which we should be worrying about. That
point is even more germane in Canada now that the federal budget is about to go
into surplus. Should we continue to hold the line on spending? Should
government debt be totally repaid? Please note that this is not a totally
ridiculous question. A generation ago, most citizens would automatically have
believed that the answer is “yes”. During the Second World War, we piled up
considerable government debt to pay for the war. However, after the war, that
debt was gradually reduced to virtually nil. More recent history is illustrated
below[3].
 |
| Figure 1 |
It is helpful to chart our debt
as a percentage of GDP. Figure 1 above shows our total public debt (federal,
provincial and municipal) for the last 10 years. The Canadian data shows that
our total debt was slowly decreasing until the Great Recession began. Since
then it has increased to 87% of GDP and has the declined marginally. Although
the federal government is expected to be balanced the coming year, continued
provincial deficits will no doubt mean this ratio does not improve quickly. The
U.S. , however, has jumped drastically from a reasonably acceptable range of
38% right up to 82.2%.
Figure 2 below, puts our performance in wider context.
Canada and the U.S., comparatively, are not the worst—almost the same as
Germany which is considered by many to be the height of financial rectitude.
On an alternative scale
of comparison (Figure 3), public debt per person, Canada, which owes $46,000 for every man
women and child, looks even worse—worse than the weak links in Europe![4]
The folks “down under” are able to do significantly better! Note that on this
comparison Spain, which has had liquidity problems and austerity protests,
looks better than us! We are, thus, not all that far from the brink!
Conclusion
If we
are to leave our country to our children at least as well off as we received
it, the above data shows that our public debt must still be reduced
significantly. That is, particularly, true when we take into account further
unfunded liabilities such as old age pensions and medical expenditures that we
are already committed to!
It may
be argued that a lot of the debt was used to invest for the future. However, a lot of that was necessary only to
maintain and replace existing deteriorating infrastructure. Given the existing
backlog in necessary spending (our local city council member recently estimated
that at the current rate of expenditure it would take more than 100 years to replace
our aging roads, sewers and water pipes), very significant capital expenditures
will be continually required just to stay in place. Given that a large portion of these capital
expenditures are merely replacements, burdening our children with new debt is
hardly justified!
Surpluses,
then, are not “slurpusses”[5]
that can be slurped up by myriad of new initiatives. Rather, at this stage,
they should be used to pay down debt. Given the increase in debt over the
recent recession, a lot of surpluses are necessary to cover the debt increases
of the last recession—let alone pay down the previously incurred debt. Whether
the debt needs to be totally paid off can be decided in the future. For now
continued surpluses (and reasonable “austerity” will be required to get us down
to reasonably acceptable levels—such as those in Australia and New Zealand.
[Click on "comments" below
to express you response to this post. Given the need for tight financial
stewardship, I would like to undertake a totally unscientific poll. Please
answer the following question: What area/item would you consider to be the best
to cut government spending—i.e. what government expenditures do you consider to
be the least important? Note, I’m not looking for researched answers—just your
opinions(as representative of the average voter)]
RELATED POSTS
[2]
Ibid
[3] To
get reasonable comparability, all data is taken from The Economist, http://www.economist.com/content/global_debt_clock
Their global debt clock, showed total global government debt to be in excess of
$55,765,852,056,000 and increasing at the rate of $150,000 or so every second!
[4]
Probably because these have not been able to borrow as much due to the apparent
riskiness of their position
[5]
William Watson, “Should we spend the slurpus?” National Post, Oct. 2014,
FP13
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