Let the borrowing begin

Prime Minister Justin Trudeau acknowledged Thursday that his government’s first budget will break his election pledge to keep deficits to $ 10 billion per year. The question Canadians need answered is how far beyond that pledge Trudeau is willing to go, and for how long?

The argument usually made to justify government deficits is that they stimulate growth. The argument against is that the resulting debt hurts the economy. While deficit spending may have a beneficial short- term impact, the damage from a ballooning debt lasts far longer. And deficits too small to help but big enough to hurt produce the worst of both worlds.

We know from the bitter experience of the 1970s and ‘ 80s that excessive government debt smothers the economy and strangles government finances. The “stimulative” deficits of those years did not fend off hard times any more than those amassed since 2008 prevented t he economic challenge Canada now faces.

Coming to grips with this lesson of history is especially crucial at a time when running deficits in hard times is increasingly not a policy choice. It is an inherent consequence of the structure of the modern state, in which slower growth reduces tax revenue while increasing social spending, and faster growth increases revenue while reducing the rate at which spending inexorably increases.

This dynamic was an attractive feature to Keynesian legislators who built “counter- cyclical” spending into program design half a century ago to overcome both government inertia and public resistance to spending borrowed money. It had the additional virtue of linking compassion to prudence, allowing governments to claim they were benefiting the country by vastly expanding its debt.

All that was long ago, before years of “stagflation” — a stagnant economy accompanied by spiralling inflation — demonstrated that Keynes’ theory was not the magic bullet politicians had hoped for.

Nonetheless, it can be hard to resist the temptation to use tough times as an excuse for more borrowing. Former prime minister Stephen Harper’s Conservatives jettisoned a lifetime of haughty rhetoric to run up a string of deficits during their final years in office, then brazenly spent millions more on advertising campaigns to boast of the “Economic Action Plan” the borrowings financed. Almost $150 billion was added to the debt total, but neither the deficits nor the hard times went away.

While Harper portrayed his Tories as the party of balanced budgets despite its record, Trudeau’s Liberals claimed to be the “progressive” alternative that would willingly extend the borrowing. At the same time, they promised to limit the shortfall to $ 10 billion a year and balance the budget by the end of their first mandate. Trudeau maintained his deficits would be both tiny and ephemeral, yet essential to recovery.

Never likely, that scenario has now fallen victim to rude realities. In a report Wednesday, the National Bank warned that the country’s fading economic prospects could put Ottawa on track for $ 90 billion in deficits over the Liberals’ four- year mandate. With conditions deteriorating faster than anticipated just six months ago, the bank said a combination of a weaker economy and Liberal promises could push borrowing to an average of $ 22.5 billion a year, over twice the $ 10 billion campaign pledge. At less than 1.5 per cent of GDP, it would be a trifling “stimulus,” yet would add considerably to the debt.

There’s the rub. It’s easy to run deficits that contribute enormously to debt, but very hard to ensure they “help” the economy. In many cases, the lag time involved in releasing government funds means the impact isn’t felt until the economy begins to recover of its own accord. Meanwhile, the expectation of continued handouts to provinces, municipalities, special interests and favoured voter groups becomes entrenched to the point that governments fear an electoral backlash should they try to turn off the spigot.

If the Liberals do not wish to preside over a repeat of the prolonged debt- fuelled decline Canada experienced between the late ‘70s and the early ‘ 90s, their first budget should commit to controlled spending and strictly limited borrowing, explicitly reject the concept of a free lunch on the instalment plan and make a positive virtue of refusing to place money in every extended hand.

“I think one of the things that Canadians expect is a level of fiscal responsibility that we’ve been able to demonstrate in the past and we’re certainly going to demonstrate it in the future,” Trudeau said in December. Now is the time to prove it.