The Canadian Finance Minister yesterday announced that the federal deficit will be at least $18B this year – before factoring in the election promises of the new government. The real deficit could expand to $28B. Or it could be less. The estimates are based on fairly pessimistic projections and includes a $6B contingency fund, which may not in fact be spent.
Predictably, the Conservatives are pointing fingers and claiming the Liberals are irresponsible. They say that they left the country in surplus. Well, sort of. It took some fairly creative – and highly questionable – accounting to make that claim. They booked nearly a billion in savings from public service sick leave – though that might well have been reversed in court. Such things have happened before. They also reduced the normal contingency fund well below $3B and held some fire sales of government assets in order to project a slim surplus of a billion or so – all based on $50 a barrel oil. And even that surplus came after seven straight years of deficits, some of which went to stimulus but part of which was due to overzealous tax cutting. It may (or may not) be true that Canadians want lower taxes but they want to pay their bills too.
Or do they? Household debt in Canada is at record highs. Some of this is undoubtedly because of people struggling to make ends meet but some of it is also because credit is cheap and we hardly live in a society where people are willing to put off till tomorrow what they can spend to day.
In any case, what is the implication of a return to deficit? The government argues that spending in a time of economic slowdown is essential to stimulate the economy and that seeking a balanced budget at this time would clearly make matters worse. The Conservatives argue things aren’t that bad. But these are the same people who tried to claim there wasn’t a recession in Canada last year – by changing the very definition of recession they invented. Their reputation as good fiscal managers relies mostly on editorial claims of the corporate media.
Meanwhile the NDP, who also campaigned on balanced budgets, are singing a slightly different tune. They accuse the Liberals of including a large contingency fund so they can dampen expectations and renege or delay some of their election pledges. The government tells them to wait and see – the budget will be released on March 22nd.
To put it in perspective, a deficit of $18B for the federal government (which raises about $275B in revenues) is the equivalent of a household with $60,000 income running up a debt of $4000. That’s not something you want to do year after year but it is certainly not unusual. More significantly, the percentage of federal debt to GDP is hovering at 25%, better than most countries in the world and not considered dangerous by more economists.
From another point of view, the US government has run deficits every year since 2002 and last year that deficit was $439B – a lot of money but less than a third of what it was the final year George Bush was in office. Is it a good thing? Hard to say but I do know that the American economy is doing better than most of those in Europe who have been practicing austerity for the last five years.
And that’s ten minutes.