Deficits Aren’t The Answer

At this year’s Manning Centre Conference in Ottawa, prominent conservative thinker Ian Brodie argued that the right should stop treating debt as a four letter word. C2C Journal contributor Jeff Hodgson looked at recent Canadian electoral history and arrived at a similar conclusion. I respectfully disagree, especially with Hodgson’s idea of running “deficits right up to the brink of a credit downgrade”.

On the surface, current government debt levels in Canada may not look as severe as they did during the 1990s, but that reality, and recent partisan conservative losses, should not cause conservatives to turn tail and run from fiscal responsibility.

Here are three reasons why conservatives should push for balanced budgets and avoid stimulus traps; the moral argument, ongoing demographic shifts, and the inescapable economic reality that stimulus and deficits are not sustainable over the long-term.

The moral argument

Imagine dining at a fine restaurant and ordering a feast with your spouse or partner. Steak, lobster, plenty of appetizers, the finest wine and a couple rounds of dessert – you’ve left no section of the menu untouched. Then the bill comes and your waiter asks, “Is it together?” You answer “yes…but she’ll take care of it” and point to a little four-year-old girl who is sitting and drawing with crayons at the next table over.

Very few Canadians would dream of trying such a stunt. So why do we let our governments do it regularly?

Governments across the country are almost all running operating deficits. In other words, the cost of annual services provided to Canadians is more than Canadians are paying in taxes. Governments finance these shortfalls by increasing debt and saddling future generation with responsibility for the debt and its annual interest charges. There’s nothing moral about this practice.

On top of deficit spending for regular operations, governments are also borrowing billions for capital “investment”, arguing that it’s necessary to stimulate the economy and build the infrastructure that will enable future economic growth.

Assume for a moment that stimulus spending works. Borrowing billions today in order to drive up, say, our economic growth rate temporarily from 1.4 per cent to 1.7 per cent, is really just a transfer of financial pain. It means today’s generation can live a bit more comfortably while tomorrow’s generation feels the pain through higher taxes and other repercussions.

Finally, I should point out that, contrary to what some suggest, government debt is nothing like your mortgage. The $100 billion-plus in new debt forecast by the Trudeau Liberal government in this year’s budget, like the $100 billion-plus added to the debt by the Harper Conservative government during the last decade, do not come with a repayment schedule. Governments almost never make payments on the principal; they just pay the mandatory annual interest charges, and sometimes they borrow to do that too.

The intergenerational debt dump

Over the next few decades, Canada’s population of seniors will grow significantly, placing tremendous pressure on government finances. What have governments done to prepare for this colossal challenge? Nothing. There’s no savings. In fact, total provincial and federal net debt is approximately $1.3 trillion.

Given the rising cost of health care, and a revenue squeeze governments will face due to waves of people retiring and paying less in taxes than working age Canadians, experts predict a nation-wide government shortfall in the $30-60 billion range annually. To put $30 billion in perspective that’s the rough equivalent of what the GST brings in each year. Clearly, we’re talking about a significant tax hike.

If conservatives want to be more competitive in elections, they should be targeting young people who will have to pay those taxes. Imagine how they might respond to a party that promised to not stick them with the bill.

The challenges posed by an aging population are severe. Now is not the time to incur more debt and make the situation worse. Now is the time for carefully communicated spending restraint.

Stimulus and deficits aren’t sustainable

The notion that economic growth will cause the debt to shrink in relation to the size of the national economy looks increasingly shaky. Prior to the federal budget, the Bank of Canada projected our economy will grow just 1.4 percent in 2016. The 2015 Fiscal Sustainability Report, authored by the federal government’s Office of the Parliament Budget Officer (PBO), projects Canada’s economy to grow, on average, 1.6 per cent a year between 2021-2089.

This low growth rate is becoming the new normal in Canada because of our aging population. Simply put, as people leave the work force en masse, there will be fewer people producing output. So even if we wanted to, there’s no way the federal government can go on running big deficits. It’s just not sustainable.

Solutions

Instead of running deficits in an attempt to drive economic growth, governments should pursue growth initiatives that don’t require tax dollars.

For instance, the Canadian Association of Petroleum Producers has indicated eastern Canada spends $26 billion annually on purchasing foreign oil. Imagine if the Trudeau government rejigged equalization payments to incent approval for pipeline projects. Oil from western Canada could start to reach eastern Canada and the $26 billion per year spent on foreign oil could instead stay in Canada, supporting our economy.

Or what if the Employment Insurance program was reformed so that it no longer served as a seasonal source of income for thousands of Canadians? Perhaps our post-secondary education system could be rejigged so that a greater percentage of students learned skills that Canadian companies actually need. Those are just a few ideas to increase growth that don’t require additional government spending.

In terms of spending restraint, government employee compensation should be brought back down to earth, spending should be prioritized, corporate welfare eliminated and more government services should be delivered by the private sector to save money. And, given our demographic trends, spending on seniors must be contained. The Harper government was on the right track in raising the eligibility age for Old Age Security from 65 to 67. The Trudeau government’s reversal of that policy is a betrayal of every young taxpayer who voted Liberal, and an opportunity for future Conservative election planners.

Conclusion

Not only should conservative activists push for balanced budgets for moral reasons, demographic forecasts suggest we would be fools to not get a handle on government spending while we still can. Even those who believe in deficits and stimulus spending need to concede both are not a solution in the long-term. If conservatives won’t embrace responsible spending – who will?

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Colin Craig works for the Manning Centre in Calgary and is the author of The Government Wears Prada.

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