Common Sense about Deficits and Spending

Well, it didn’t even take as long as I might have thought for the political consensus to change. All of a sudden, deficits are back in fashion in Canada. I suppose for those of us who want this country to be more like ones they deem “successful” the idea of piling debt upon debt and never making hard choices would be validated, in some perverse way, by the fact that these other nations haven’t fallen into even deeper trouble — yet. For those of us who would prefer Canada to chart a common-sensical course of its own, however (as we had been doing since the mid-1990s, spending less than we took in in taxes and paying down the accumulated inheritance from the previous generation shoved onto our shoulders to bear) this development is one of the most gloomy in a year that has had no shortfall in mood swings, financial fallout and decay.

Paul Martin, of course, has been talking to any outlet that would print his musings in the past forty-eight hours about how poorly the Harper Government has done — because they’re not sitting on that slush fund formerly known as “massive Federal surpluses”. There is a minor consideration here: had the Conservatives not consciously set out to balance the Federal books there would be a huge surplus available to throw into relief measures without the possibility of a deficit. Of course, Martin himself never saw these surpluses as feedstock for a rainy-day fund (i.e. not to be spent) — and that’s the major consideration. Martin, like Chrétien before him, was an over-taxer who saw to it that slush money was available to throw around.

At least Harper has ensured that the slush capability is gone. Far better, of course, would have been to lower taxes and let Canadians keep their hard-earned gelt — to balance the Federal budget by reducing intake to match outflow — than by sloshing around money at an even faster rate than either of his Liberal predecessors (and they were outright masters, never seeing a “priority” that didn’t need funding).

The Keynesian proposition was that it was the proper role of government to provide a counter-weight to the economic trend: if the economy slowed and hardship rose, the government should use deficits (if it did not have an accumulated rainy-day fund for the purpose) to create new activity and thereby relieve the hardship. Once the next upswing took hold, however, the government was to retire the debt it has accumulated and restock its rainy-day provisions for a future downturn.

Well, it only took the first downturn to move into the post-Keynesian consensus: “there’s no need to pay off the debt because we owe it to ourselves”. This is the source of the notion, expressed by Gordon Campbell (no lightweight in the wasteful spending department himself) of BC about how deficits create the desire for “a little more deficit, please” — and the Mulroney Government’s discovery that once an entitlement or handout is created, taking them back is the devil’s own job.

Give a grudging credit (a somewhat tarnished penny would be about right) to Chrétien and Martin for having finally faced up to the reality of a generation’s worth of indisciplined spending by balancing the budget and then beginning to retire the accumulate debt. It’s not much credit precisely because their hands were being forced: the country’s credit rating was at risk, and interest payments on the debt were more than 33% of Federal spending. (Indeed, Mulroney and Wilson managed operating budgets that were balanced — what a business calls EBIT [earnings before interest and taxes] — but ran deficits to cover the interest payments, causing them to grow annually as a percentage of spending.) Doing something that needs doing earns credit; doing it before you’re forced to is the real accomplishment.

Now a Federal deficit waits in the wings, as tax receipts are projected to fall. But the problem isn’t that income will drop below outflows. The problem is that outflows were not reduced while we had the chance. Now, as with Chrétien & Martin, we’re going to have to do it while times are tough.

The reality of this country is that taxes are too high, because we will not make hard choices.

I can recall saying, earlier in the year, that I’d cut off the whole Department of Sport and Amateur Fitness. An outcry ensued bemoaning my hard-heartedness towards the dreams of athletes, and the joy the country would feel as Canadians mounted the podium to receive their medals. Well, in a choice between panem and circenses, I choose bread over circuses. I know amateur athletes, and I know how hard they work and how little support they get today. But this is not a priority and I am willing to make hard choices about that, to say rather than “too little spread too thinly” to make a difference, “none” would be better. If times were better (or about to be so: as I’ve previously written, there are structural reasons they won’t be) I’d be more willing to spend “well and focused”. But we must choose, not try to have it all and defer the costs into a future even less able to pay for than we have been for the lavish waste of Trudeau and his followers.

Common sense would say that, if times are going to be structurally hard — especially if they are deflationary — cash is king, but only if it is in the hands of Canadians. Now we could tax it away, only to send it back as entitlements — but that comes at an average cost of 20% “lost” paying for the bureaucracies that do this under best circumstances (as I have previously written about). Far better to reduce tax receipts and leave the cash in the hands of Canadians with no losses due to it passing through Ottawa.

That, in turn, would require that programme spending be cut, so that outflows would once again match inflows (at a new, permanently lower level). In other words, we would choose what was better done by central redisbursement (with all its friction costs), and what was better done locally, as a matter of local choice.

But common sense comes at a steep price. It requires politicians that not only have the courage of their convictions to push an unpopular change through the din and clatter of every two bit agitator, opposition member, interest group, media “personality”, etc. claiming that the end of the world is nigh and that those taking action are heartless bastards who don’t give a damn about anyone but themselves; it requires that we learn to change our expectations. Governments aren’t in the growth business, and they’re not mummy coming to kiss every little mishap better. They aren’t here to pay for things we won’t pay for ourselves, and to support causes we think other people ought to support.

They’re in the business of peace, bien-être and good (i.e. prudent) government, and nothing else, when the chips are down. The result of that is order, including a society where subsidiarity lets decisions take place close to the action — and the closest place to the action is in each of our homes, not in some Palais des fonctionnaires off in a capital somewhere.

Common sense has been in very short supply. Call it Conservativism if you like; I call it Toryism — another capacity in very short supply. But I hope, as Harper’s 1,000th day in office approaches, he and his team can find it, and the courage to pursue it.

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One response to “Common Sense about Deficits and Spending

  1. Well written. I agree with pretty much the entire thing. We do need to prioritize during economic difficulties, and as a perfect example, the 2010 Olympics are something we shouldn’t be putting a red cent into.

    Speaking of pennies, I enjoyed your metaphor.

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