Deficit and Debt Phobia: An Addendum

Further to my post of last week, I note that the Department of Finance Update of Economic and Fiscal Projections shows that the federal debt to GDP ratio will start falling after the next fiscal year … ie from 2011-12…. even though we will be running quite significant fiscal deficits — eg $27.4 Billion in 2011-12.

While many media pundits scared themselves silly by adding up the annual deficit numbers to conjure up a seemingly very big number, the reality is that modest growth and low interest rates will stabilize the debt at a level a bit higher than before the recession, even while we run deficits. In short, the projected deficits are NOT setting the stage for a return to the fiscal problems of the late 1980s and early 1990s by a long shot, and there is absolutely no good reason why we should rush to bring the federal budget back into balance.

3 comments

  • entirely unrelated.. but I wanted to share with all economists… interview with Nassim Taleb by Margaret Wente Globe and Mail Update Monday, Sep. 14, 2009 08:34AM EDT

    “Governments should also decrease the role of economists – they’re no more reliable than astrologers, and they do more damage.”

  • Leanne I would agree with your quote if you made one change-

    “decrease the role of neo-con economists”- the rest of us us are just fine, thank you.

    the correlation between an economist’s brain wave activity and thoughts of unfettered markets is what I would use as my classifier.

    the higher the correlation- the more governments should decrease this economist’s role.

    paul

  • thanks Andrew for the example of a correlation between increasing deficits and reducing debt.

    i can see that deficits can be used, along with low interest rates, to spend for public social programs and alternative energy, creating good jobs and necessary social supports that are part of the foundation of a sound economy, as you’ve said in the earlier post. these elements will not Inevitably Lead to Debt Bondage for our Grandchildren as some conservatives would have us think.

    rather there are other factors at play which are responsible for federal debt.

    i still think that if conservatives and liberals are really serious about reducing federal debt, they should use the Bank of Canada properly and not borrow from private bankers even if market interest rates are low now (the rates can bump up in future).

    they could also stop promoting public-private partnerships and re-regulation processes that hand over the reins to private finance in the context of investment (aka trade) deals and the insatiable casino those deals have engendered.

    but given past and current behaviour, its doubtful they will take these sensible steps.

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