NDP’s “Balanced Budget” Platform

Jack Layton unveiled the NDP’s policy platform today.  Among other things, it promises to eliminate the deficit (i.e. balance the federal budget) within four years.  I’m not sure it should.

Several years back, I had the opportunity to take a directed reading course from John Smithin.  In addition to being a long-time member of the Progressive Economics Forum, John is a York University Professor in both the Department of Economics and the Schulich School of Business.

One of the things I learned from  John is that it is *not* important to balance the federal budget.  Rather, what’s important is that, over the long term, the size of Canada’s economy grow at a faster rate than the size of our national debt.  As long as the Bank of Canada keeps real interest rates low (i.e. no more than 1% or 2%), Canada could conceivably run a deficit every year.

While I understand that the NDP must feel intense pressure to capture votes– including from people who have never taken a course from John Smithin–I often wish that the NDP would show a bit more policy leadership on the issue of the deficit and debt.  I was particularly disappointed during the 2008 federal election campaign when Mr. Layton stated, unequivocally, that the NDP would not run a deficit in the following year if elected (even though it was clear that Canada was entering a recession).

For the record, I fully intend to vote NDP in this election.  But I’d love to see the NDP get out in front of this issue at their next policy convention.

7 comments

  • Your arithmetic is incontrovertible. Fiscal sustainability depends on the debt-GDP ratio, not the annual budget balance.

    I appreciate the frustration with the NDP contributing to deficit-phobia. However, let’s remember that the CCPA (which is far freer from political constraints) adhered to a balanced-budget rule for years in formulating the Alternative Federal Budget.

    Why make the politically-difficult case for deficit financing when billions of surplus dollars are available? The federal NDP adopted its balanced-budget policy during the same era of budget surpluses.

    The 2008 campaign was unfortunate because parties staked out their positions before the financial crisis unfolded. Journalists then played gotcha, trying to jump on any admission that a deficit was possible.

    Dion fell into that trap. I cannot say I blame Layton for avoiding it.

    However, now that deficits are an accepted reality, I agree that we should try to improve the political discourse.

  • I suppose it matters what level of debt one considers sustainable, such as in the face of possible future crises that might require borrowing. I don’t think anyone disagrees with the idea that a low deficit with a modest stable debt/GDP ratio is sustainable in the absence of dramatic new demands. It might be less sustainable if the debt/GDP ratio was already considered high and if a new fiscal mess is reasonably anticipated. A country that has been reducing its debt/GDP ratio in good times is in a better position to weather future storms.

    As I understand it, and this story is obviously incomplete and somewhat misleading, many European countries used the idea that they could run deficits that were tolerable in the presence of sustained growth. Then the crisis rolled through various countries, widening the deficits to a point where the budgets broke, forcing dramatic austerity and bailout packages. So I think people take balancing the budget as a matter of credibility: You aren’t going to run the debt up a lot and leave us in a precarious position.

  • Given the massive give away in tax cuts by Harper, I truly do not see how Canadians can expect to have the level of traditional public goods and services without some form of medium term deficit financing. Yes I realize the AFB and everyone else has a formula to balanced budgets, but with corporate taxes a mere shadow of what the were some 20 years ago, it will take a whole pile of growth or it will tax some major tax reform to keep the books out of the red and push into the black.

    With the current political discourse of anti tax and now the blowing winds of austerity, I really really really do not see a negotiated settlement towards balanced budgets unless somebody makes some dramatic changes.

    It has been Harper’s grand plan since day one,starve government of resources and hence its power. It is a blatant somewhat successful under minority, wait till he gets a majority.

  • Also, I wouldn’t worry about the NDP not running a deficit. Their platform is costed with $8.6 billion in new revenue from “cracking down on tax havens.” I’ve always considered “we’ll collect tax better” to be a weak promise.

  • Does happen sometimes, though. In Hugo Chavez’s early years, before he ever started talking about socialism, one of the major reasons the wealthy pushed so hard to try to get rid of him was that he gained control of the tax service and actually started forcing wealthy people to pay their taxes. Whoo, were they outraged!

  • I have a bit of a different take in my post. I think the real debate is over the best route back to balance, albeit that we may not need to get back to a zero deficit as opposed to stable debt.

    http://www.progressive-economics.ca/2011/04/11/comapring-the-platforms-a-better-way-to-a-balanced-budget/

  • At any rate, one can’t really say it’s not in the NDP tradition to balance the budget. Tommy Douglas was a balanced-budgets kind of guy–didn’t believe in owing money to bankers.

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