World wouldn’t end if feds ran a small deficit
“Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery.” — Mr. Micawber, in David Copperfield
A year is conventionally defined as the period of time it takes the Earth to orbit once around the sun: 365 days, five hours, 49 minutes and 12 seconds, give or take a leap second. This circumsolar interval is of importance to farmers, timekeepers and the dwindling number of manufacturers of desktop calendars. It is of no importance whatever to the economy.
In any given year, the number of cars assembled or salads julienned will tend to be twice as many as would be in six months’ time, or roughly half as many as could be in two years. There’s no particular reason, that is, to fixate on the amount produced in a single year. Whatever sentiment may attach to that particular mark on time’s yardstick, it’s just a number.
So it is with government budgets. It is generally wise for governments to avoid running deficits that are too large for too long, lest they run up the kinds of debts with which this country was familiar not so long ago — at one point the federal government was paying 37 cents of every tax dollar just to service the debt — and to which several of the provinces are now headed. The longer governments remain in the red, moreover, and the higher the debts they amass, the greater the risk to which they leave themselves exposed, whether of a spike in interest rates or recession or both.
So yes, it is a good thing for governments to balance their budgets over time, but there is no necessity whatever that “over time” be defined as exactly one year. There’s nothing wrong with doing so, to be sure: it may indeed help to avoid running deficits for 10 years if the government avoids doing so even for one, rather as an alcoholic is best advised to avoid drink altogether.
But the world would not end if the federal government were to run a small deficit in the coming fiscal year, instead of the small surplus promised. (Mr. Micawber was many things, but an economist was not one of them.) Whatever impact the oil price collapse may have on Ottawa’s finances, it is comparatively minor — the federal government does not depend on the oilpatch for royalties in the way that Alberta does, and while a decline of this magnitude in the price of oil, for a net exporter of oil like Canada, must be presumed to be of some net harm to the economy, the effect is not a large one.
Neither is the effect on federal revenues. We are talking about a few billion dollars at most, perhaps enough to exhaust the $3-billion buffer for “contingencies” the finance minister pencils into every year’s figures, but not much more than that. That’s even if we assume oil prices remain at their present lows, and do not, as many predict, bounce back (since nobody can predict, the current price is probably the safest assumption).
Suppose the deficit turned out to be $3 billion. That’s on federal revenues of close to $300 billion, beside an economy of roughly $2 trillion. It’s trivial. Indeed, you could run a deficit many times that size without disturbing the federal debt-to-GDP ratio on its relentless decline. Now at 30 per cent, it is headed for 25 per cent in a few years, a destination it would reach whether the federal government ran small deficits en route or small surpluses: all that would change would be the definition of “a few.”
So all of the squawking, on both sides of the aisle, over the supposed need to rethink federal finances in light of the oil price decline seems more than usually overblown. The Conservatives have put back the budget to April or beyond, apparently in the hopes that, as Mr. Micawber might say, “something will turn up” — a rebound in oil prices here, a tweak to the assumptions there, or as Jason Kenney was intimating the other day, some further cuts in spending.
The opposition, for their part, accuse the government of “panicking,” “having no plan” and other traditional opposition chestnuts. The NDP in particular have offered up such helpful bits of advice as rolling back the projected increase in the age of eligibility for Old Age Security, which would increase the deficit, not reduce it, though in any case not until 2023, which is when the OAS changes start to take effect.
One way or another, however, it can safely be assumed that by the time Joe Oliver rises to his feet to deliver it, the budget for fiscal 2016 will be balanced — if not in actuality (we will not know that until the numbers come in at the end of the year), then certainly for the purposes of saying so at the time.
And that is all that this is about. The government promised the budget would be balanced by this year. It further promised that certain other promises would be triggered once balance was achieved. And it would like to be able to claim all of those promises were kept going into the election, which it promises will be this October.
Do not get me wrong. It is a good thing for governments to keep their promises, just as it is a good thing for them to balance their budgets. We might even make it a rule that they must do so, say, over the business cycle, typically a few years. But over a single year? That’s a political imperative, not an economic one.