Thinking About Structural Deficits
I am a great admirer of Arthur Donner and Doug PetersÂ who have kept the flame of Keynesian economics alive in Canada for many years and regularly provide good progressive commentary. But I’m a bit out of sympathy with their column in today’s Toronto Star.
Their major argument is that Canada now faces structural deficits, and that tax increases will be needed after we return to full employment.
“The structural deficit means that tax increases, spending cuts or both will be needed to restore the Canadian government’s fiscal situation to a balanced position. Merely reaching full employment will not be enough. ”
That is entirely correct, and I entirely agree that, today andÂ down the road,Â we are paying the price for the erosion of fiscal capacity by Liberal and Conservative government’s alike.
What I am a bit less keen on is the assumption that we should run balanced budgets after we return to full employment. That could, admittedly, be a long while depending on how full employment is defined, but the Bank of Canada would define it at the estimated ‘natural’ level of about 6%.Â I very much doubt that either household or business credit will expand very robustly for a good while yet, in which case we have to be thinking about public investment led growth for an extended period of time.Â Â We have come to the end of a fairly extended period in which rising household debt drove growth as governments and the corporate sector both became large net savers, and I see no reason why we should not advocate an extended period of structural deficits to allow households to repair their balance sheets.
In an ideal world, public investment led growth will gradually crowd in enough private investment that government can pass the growth baton to business — but that’s not about to happen in the next few years.
Not to be misunderstood, we may want to restore fiscal capacity movign forward, but I would direct the proceeds to new investment rather than to trying to bring down deficits at too rapid a pace.