On Balancing the Budget

Andrew Watt has written an especially cogent piece on why the balanced budget rule proposed for the Euro area by Merkel and Sarkozy is a very, very bad idea.

It also makes relevant reading for Canadians.

Andrew points out (1) that fiscal rules have to take into account overall balances and that the public sector cannot balance if the private sector wants to save, unless a country, in this case the Euro area, is running a large balance of payments surplus (2) that it makes no sense not to borrow to finance public investment  and (3) that talk of balancing the budget over the cycle cannot be translated into operational rules for annual budgets since we can only identify the cycle ex post.

Meanwhile, Finance Minister Flaherty today effectively said he will balance the Budget regardless of the darkening economic outlook, which means that he will force spending cuts despite a probable increase in household saving, a probable decline in business investment (and thus an increase in business saving), and despite a probable further deterioration in the external balance.


One comment

  • Lets just say they obviously are pretty confident that Canadians will not react like other countries have to austerity measures. However, if Canadians are going to face a renewed slowdown from south of the border, we will witness a further slowdown in the two largest provinces.

    So you might not get them out on the streets in Calgary of Vancouver, but Toronto and Montreal could be just a few more thousand lost jobs away from an Egyptian spring. I wonder how that will play out in this staggered economy increasingly resource extraction economy? And what happens if oil keeps falling and the Oil sand development is put on the back burner?

    What happens when household debt levels can no longer be maintained with an increasingly precarious labour market, what happens when housing starts slipping and people cannot go for that life line second mortgage to make ends meet, what happens when social transfers are further cut by Flaherty’s social cuts, what happens when the local level gets more entries of the nasties like Ford.

    What happens when Canada now movig further to the far right at all levels of politics that every social stop put in place over history to stop recessions, is destroyed and we fall.

    What then.

    An Egyptian spring or more likely an English Summer cannot be that far off.

    Mark it on your calender.

    Destructive public and social policy will only be met with the same response from the public. Sorry but that is not the Canada that we have come to expect and it will be the eventual end of the neo cons in Canada and mark a dramatic move to the left.

    If I thought Harper was more pragmatic then I would not make such predictions. But he is an ideologue and his destruction of Statistics Canada is proof of that. Destroyed a multi billion dollar world leader in social and economic measurement in one signing of the pen and then they had a party at local pub with Clement having a mock census made up to celebrate the far right victory.

    Nasty brings nasty- history shows it quite well but for some reason the far right just does not understand it.

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