Balanced Budget Myopia Breaks Both Ways
Opinions on deficit budgeting have become a short-hand litmus test in Canadian politics. Deficits are left-wing and balanced budgets are right-wing austerity. Â Economists know that there is virtually no difference between a small surplus and a small deficit, but politicians and voters areÂ a different story.
I have spent the past three and half years railing against premature Conservative budgetary tightening, so when Thomas Mulcair said he wasn’t entertaining the possibility of a budget deficit in 2016, I was among those progressive economists who groaned and rolled their eyes in frustration.
When we reduce policy discourse to “deficits good vs.Â deficits bad”, we miss talking about the whole host of choices that go into budgeting. One can imagine deficit spending that *isn’t* progressive, and balanced budgets that would make Tommy Douglas proud.
For example, let’s look at the Conservative record. While many hands have been wrung over their obsession with balanced budgets, Harper & Co.’s insistence on low corporate and personal incomeÂ taxes has severely hampered their ability to actuallyÂ balance the books. Big ticket commitments such as the F35 boondoggle weigh on the books at the same time that services to veterans have been cut.
Rather than simply be happy or upsetÂ that the Conservatives have run mostly deficits, we should analyse spending and taxing choices on their own merits.
The same should be true of opposition promises. Rather than be happy that Trudeau has promised three straight deficits, and upset that Mulcair has promised to balance the books, let’s take a closer look at what the two parties are actually promising.
Liberal promise: “We will boost investment in public transit by nearly $6 billion over the next four years, and almost $20 billion over ten years.”
NDP promise: “$1.3 billion annually over next 20 years to ensure stable, transparent public transit funding for municipalities.
Municipal / Green Infrastructure
Liberal promise: “We will boost investment in green infrastructure by nearly $6 billion over the next four years, and almost $20 billion over ten years.”
NDP Promise: “$1.5B annually for local infrastructure, including roads, water treatment, and public transit.”
(Note: These promises don’t exactly overlap, but municipal infrastructure upgrades certainly qualify as green, and theÂ Liberal website includes water and wastewater in their green infrastructure plan.)
Liberal promise: “We will also boost investment in social infrastructure by nearly $6 billion over the next four years, and almost $20 billion over ten years.”
- 370,000 childcare spaces by 2019 ($1.9B annual cost), 1,000,000 million childcare spaces by 2023 ($5B annual cost).
- $2.7B annually forÂ affordable and market-rental housing units, including incentives for co-op housing.
If you notice a trend in the Liberal promises, you’re not alone. For simplicity they seem to have identified three priority areas, and split the spending evenly between them. The New Democrat promises are messier, if you will, but the commitments add up to equal or better than the Liberal promises, at least over a 4 year timeline. LookingÂ here, you can see the Liberal numbers get smaller near the end of the first mandate, and then bigger as we go into the future.
How to Balance?
Mulcair has said he will make different choices than the Conservatives or the Liberals. These promises include raising corporate income taxes and changing howÂ stock options are taxed. Trudeau has said he won’t raise corporate taxes, and indeed mused about lowering them further.
While the Liberals have said they’d raise personal income tax rates on high earners, their cut in theÂ $44,401 and $89,401 tax bracket means nothing for most workers, and results in lower overall taxes for those in the $150,000 – $200,000 range.
We don’t know the whole picture, though, because no party has put out their full costed platform.
Beyond Simple Numbers
The Liberals have also promised alternative financing of infrastructure, which means moreÂ P3s and user pay models, such as the 407 toll highway in Ontario. It’s hard to make the case that these are progressive policy choices.
While I stand by my belief that deficit spending is sometimesÂ a good idea and better for long term growth, I also stand for more context in policy analysis than just ‘balanced budgets equal austerity’. That kind of analysis is as shallow and incorrect as ‘deficit spending will turn us into Greece’.
Not sure why healthcare funding is not an issue. (Not that election campaigns are about the issues, or politics outside of campaigns for that matter.)
Mulcair says he will reverse Harper’s $36-billion cuts to healthcare funding and his pro-cyclical funding formula. (Meaning funding drops during recessions: double-whammy to the provinces.) The PBO says healthcare funding is “unsustainable.” But the economic scientists on Team Trudeau gave Harper’s plan the Imprimatur.
None of that is important. All voters need to know is:
“The Trudeau Liberals are now the true party of the Left.”
Since the corporate media spins political coverage in a way that is favorable to its shareholders — and Canada holds a horse race in place of a democratic election — this is the meme that will cancel out any and all blather about economics and other issues that about 0.1% of the voting population bothers to familiarize themselves with.
My advice: nuke some popcorn, sit back and watch the ridiculous spectacle unfold from a safe distance. (Reminds me of hillbillies holding a contest about who can coax a dumb beast to their side of the pen. Winner takes all. It’s called freedumb and dumbocracy!)
I have NO objection to Tom Mulcair declaring that they will avoid a deficit in 2016 because I know that Tom Mulcair leads the NDP and the NDP will make different choices than the Conservatives.
Bill Mitchell â€“ Modern Monetary Theory â€¦ macroeconomic reality.
“There is no reason that a fiscal balance should be anything in particular over any particular time period. It should be whatever is necessary to support the non-government spending and saving decisions and ensure there is sufficient spending in the economy to achieve full employment.
If that requires continuous fiscal deficits of 10 per cent of GDP then so be it. It is required permanent surpluses of 10 per cent of GDP then so be it.
For a nation with a very large external surplus (say a large energy exporter) and strong private saving, then a fiscal surplus might be appropriate.
But most nations will have external deficits of varying magnitudes and then if the non-government domestic sector desires to save, the public balance has to be in deficit, or else a recession will ensue.”
Letter to Hill Times
re: Time to talk about deficit spending, Sept 1
Andrew Thompson, star NDP candidate and former provincial finance minister, argued on a CBC panel that we can’t afford deficit spending to build bricks-and-mortar hospitals because then we wouldn’t have enough money to pay for doctors. Good thing Thompson was not in charge during WWII. After all, building munitions, tanks, ships and airplanes would mean no money left for soldiers!
Thompson seems unaware that the federal government, unlike a province, owns a central bank. During the recent financial crisis, our federal government set up a $200 billion “facility” to deal with liquidity problems in the financial system. Note that the government was lending to, not borrowing from the private sector. Also, under the Harper Conservatives, taxes did not go up.
Can Andrew Thompson tell us where the $200 billion came from?
1. Improving Access to Financing and Strengthening Canada’s …
To soften the impact of the crisis, the first phase of Canadaâ€™s Economic Action Plan included measures to provide up to $200 billion to support lending to Canadian households and businesses through the Extraordinary Financing Framework.
In addition, the Extraordinary Financing Framework is comprised of five elements: (1) providing
funding to Canadian financial institutions through the Insured Mortgage Purchase Program and
the Canada Mortgage Bond program; (2) expanding financing for Canadian businesses through
Export Development Canada and the Business Development Bank of Canada;
(3) increasing collaboration between financial Crown corporations and private sector lenders
and credit insurers under a business Credit Availability program; (4) designing a Canadian Secured Credit
Facility; and (5) initiating a Canadian Lenders Assurance Facility and the Canadian Life Insurers Assurance
Facility to provide insurance on the wholesale term borrowing of federally regulated deposit-taking institutions,
and life insurers. Additional measures include the ability to offer guarantees on bank and insurance liabilities,
and the authority to engage in transactions to maintain financial stability, including providing capital injections
2. Government has a printing press
Ben Bernanke, 2002, National Economists Club
Deflation: Making Sure â€œItâ€ Doesnâ€™t Happen Here
According to Bernanke:
But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.
Alan Greenspan, Federal Reserve Chairman, 1997
“[A] government cannot become insolvent with respect to obligations in its own currency. A fiat money system, like the ones we have today, can produce such claims without limit.”
3. MMT: What it Means for Canada
Progressive Economics Forum
….if we have the resources, money is no obstacle to a government that issues its own flexible exchange-rate fiat currency. It is not saying that creating money magically creates goods and services. It is saying that it is nonsense to think affordability for such a government could be about money rather than resources. It shows that assertions questioning the capacity of the FEDERAL government to pay for programs, usually prefaced with the call for â€˜â€˜adult conversationsâ€™â€™, and couched in terms such as fiscal sustainability, solvency, and unfunded liabilities, are red-herrings that will lead to needless reductions and privatizations of public programs in health care, elder care, pensions and so on.
What is Modern Monetary Theory, or â€œMMTâ€?
The essential insight of Modern Monetary Theory (or â€œMMTâ€) is that sovereign, currency-issuing countries are only constrained by real limits. They are not constrained, and cannot be constrained, by purely financial limits because, as issuers of their respective fiat-currencies, they can never â€œrun out of money.â€ This doesnâ€™t mean that governments can spend without limit, or overspend without causing inflation, or that government should spend any sum unwisely. What it emphatically does mean is that no such sovereign government can be forced to tolerate mass unemployment because of the state of its finances â€“ no matter what that state happens to be.
But Angella MacEwan, isnâ€™t it true that since government balance + private sector balance + net exports has to equal 0, that (unless thereâ€™s a trade surplus) a balanced government budget always has a depressing effect on the economy? So the macroeconomic effect of balanced budgets, whether or not Tommy Douglas would approve of where government money was going, would still be negative, right?
Sure, thereâ€™s not much difference between a small deficit or surplus, but thatâ€™s mostly because either one of them is useless, macroeconomically speaking. I donâ€™t think balanced budget multipliers or shifting spending around can get us enough oomph to make up for all that was lost in 2009 and the current recession (compounded by the intervening stagnation).
What I donâ€™t like is the implication that a balanced budget is a thing at all. Isnâ€™t balance actually a steady debt to GDP ratio, i.e., the government spending about $24 billion more than it takes in?
(I actually agree with Larry, but I got that last paragraph from Nick Rowe at Worthwhile Canadian Initiative, which isnâ€™t even a *progressive* economics forum, I think.)
My point is actually that balanced budgets *aren’t* a thing at all, whether you’re for or against them. I have said that net debt to GDP is a far better measure of fiscal sustainability. But if you’re comparing platforms, then you should compare actual promises before calling something “austerity” which isn’t.
New IMF Paper Shows Yet Again that Reinhart and Rogoff Results Are Erroneous
Author: L. Randall Wray Â· February 14th, 2014
“For a sovereign currency issuer, what really matters is unemployment and living standard, not debt ratios.
If youâ€™ve got your own sovereign currency, and you do not peg, and you do not issue debt denominated in a foreign currency, then there is no reason to suppose that higher debt ratios cause lower economic growth. Yes, budget deficits can be too highâ€”causing inflation. They can be too lowâ€”causing slumps. Debt ratios can be high for â€œgood reasonsâ€ and they can be high for â€œbad reasonsâ€. Focusing on government debt ratios, alone, tells you nothing about the health of the economy in such cases.”
I appreciate that this is the first article to really talk about this honestly.
Mulcair’s budget stance is more of a strategic political mistake than an actual policy mistake.
But in elections (and in politics) it is always the former that matter, not the latter.
Deficits are nominally higher then the in the 1930, to 1945, to 1960 and years since. My grandmother voted for increasing those deficits but now the nominal figure boggles her mind because of all the things she sees. High nominal debts are seen as wrong but if you adjust for inflation, you might have a different opinion. Prices and wages do not match because Canadian’s households have used debt to buy goods & services, which support those higher prices; they have too deal with.
Interest rate’s as high of 20% would crush people, & 5% I think would kill the economy. Private & Public debt would be too burdensome. Low interest rates & inflation is more likly then deflation & higher rates of interest.
Eventually because of inflation I will have higher wages & prices too the point because we cannot raise interest rates now, or really ever. Debt will increase every year, that very debt public or private will prevent any increase in rates to higher levels not seen in years. Inflation I see as the problem not as the solution.
All of you fear the government saving at the same time as every citizen. Only way to prevent deflation is low interest rates, high spending by public & private. We cantrol the printing press so we can induce enough spending, no one will save even a nickel. Honestly nominal prices are the problem, especially since the rich take higher incomes. Someone with 11-14k to 24-30k a year hate higher prices.
Thanks for answering, Angella MacEwan. I was, I think, slightly misled by some details of your article. Framing, you know.
So we all agree then that the effect of balancing the budget is in and of itself contractionary. So Mulcairâ€™s balanced budget pledge at least is *not* progressive, and I stand by being annoyed and frustrated with him.
But you did say you were too. And youâ€™re right that at the moment we could shift taxation around and make different spending decisions and maybe counteract some of that effect. It â€œhelpsâ€ that the Conservatives have been so profoundly wasteful.
But come on! Deficits *are* good, and balanced budgets *are* right-wing austerity. I mean, in ordinary macroeconomics (as I imagined I understood it) adjusting the governmentâ€™s fiscal balance toward the black has a contractionary effect. Sometimes, Iâ€™m told this is good, for example if you need to keep inflation from getting out of hand. At other times itâ€™s bad, like in the last 30 years or so, and especially now.
Here are some other spots where I think you gave the wrong idea. Starting paragraph 3 you left out the word â€œbut,â€ as in â€œBut when we reduce policy discourse to â€˜Deficits good/balanced budgets bad,â€™ we missâ€¦â€ And in paragraph 4, you accidentally gave a little too much credit to Conservative goals. How about â€œHarper & Co.â€™s insistence on low corporate and personal income taxes has made their attempts to â€˜balance the booksâ€™ much more damaging than they might otherwise have beenâ€?
I was also taken aback by the first sentence of your last paragraph. Donâ€™t you mean â€œOf course I know perfectly well that deficit spending is almost always better, more sustainable, and sounder from any informed economic perspective, whether progressive or mainstream, as well as providing room for a wider range of critically necessary initiatives to protect the environment, promote justice, and enhance growth; but we still in times like these need to go beyond simple condemnation of balanced budgets and look at the nitty-gritty of economic policyâ€? Surely thatâ€™s what you meant?
Thank you for a thoughtful analysis that points out the limited value of black and white reaction.
My main frustration with the NDP is that they have squandered their time in opposition when they could have at least tried to move policy discourse enough to the left so that they wouldn’t feel they had to promise balanced budgets come election time to be considered electable because that would no longer be a sign of electability, or responsible fiscal management, but plain bad economic thinking. I mean if they can’t at least try to move the needle when they are at their strongest in parliamentary hisytory, then when? Once they’ve been elected, on a “responsible” platform and find they face the same constraints from the same constraining mindsets they failed to challenge?
The economy is demand-depressed–so a policy choice by any government to seek budgetary balance, or even surplus, means cutting. Thankfully, Canada has its own currency and does not need to worry about the implications of deficit-spending, so long as it’s used to lift the economy by directly putting people to work. No amount of tax-hiking is going to accomplish that–we need investment to get the economy chugging. Your declared support for the NDP’s centrist nonsense about four years of surplus is economically foolish–it’s an unserious promise that is indistinguishable from Conservative austerity. The effect on employment and GDP will be the same.
A problem for the left is division.
You have a camp that I will allways back, as conservative. I hate inflation, Erin Wier is usally the progressive most to address wages that will even mention prices. The camp that increases taxes the most is deflationary, if they were only to increase spending by the same amount, there is no new money injected in circulation or in the money supply. You can raise taxes to 90% I will still back you as a conservative as long as there is no new money created. The same effect occurs if you cut taxes & spending equally, there is no new money added & even deflationary.
Now if you hike spending while cutting taxes, or hike taxes but double government spending (devaluing the currency included) you will inject new money into the system. I do not support these ideas or anything inflationary.
I will support every NDP government that balances their spending through tax rates as high as 90%, or evey conservative that cuts spending balancing to match taxes.
As long as their is only one conservative party, those on the left have two parties.
Those on the left who want higher taxes, and a small a deficit or small surplus is just as deflationary.
Those on the left who want expanded deficits & higher taxes is inflationary. Hell we could hike spending & cut every tax to whatever, or leaving tax rates alone or increasing rates as long as we finance the amounts of dollars needed through the central bank.
Do you vote NDP or Liberal? or do you start a new party from scratch? or join a third party. As long as a majority of conservatives, never split there vote between two or more parties like alliance, & progressive conservative & i would lump in liberals who were fiscally conservative for balanced budgets but were cultural & social progressives who vote conservative.
Straight progressives should be trying to merge the NDP with the Liberal party. Vote as one block. You will see legislative victories not seen in decades.