The risky business of running a deficit

But alarmism and complacency are not the only responses open to us. It is possible to believe both that deficits of the sort the budget envisages will not ruin us and that they are not a good idea.

We live in a world of risks, not certainties; degrees, not absolutes. Taking on more debt does not, in itself, mean fiscal disaster, but it does mean exposure to greater risk. The extra risk involved in the present case may seem small, with a deficit and debt of just 1.5 per cent and 31 per cent of GDP, respectively. But it is not zero. In 1974-75, when the federal budget began its headlong descent into deficit, the risks must have seemed at least as small, with a debt-to-GDP ratio of just 18 per cent of GDP. Stuff happens.

Of course, everything worth doing comes with risk. If there were some significant offsetting return, the extra risk might be worthwhile. It’s the failure to put those borrowed funds to productivity-enhancing use that is the real indictment of the budget. Indeed, the very nature of deficit financing, far from requiring this sort of exacting scrutiny of risks and returns, is to encourage the opposite: scarcity having seemingly been abolished, hard choices no longer seem necessary.

This is especially true when, as now, there is not only no obligation to balance the books on an annual basis, but no longer-term benchmark, either: no balance over the life of the government, nor even a declining debt-to-GDP ratio. Yet there is no obvious or immediate consequence of this, either. We are forever wishing for rules to guide us, bright lines separating prosperity from calamity. But the awful truth is there are no such rules. There is only our best judgment of what is more or less likely to result from this or that choice, other things being equal.

How then should we proceed? From the foregoing, you will be unsurprised to learn that I favour a rule, as simple and absolute as possible: a balanced budget law will do nicely. For judgment, of the kind I described, is not given to democracies. The tendency to underestimate future risks, set against the delights of present spending, are too great. At any given moment, it is always possible to rationalize going further into debt, until our debts have become quite dangerous. And while it might seem as if we could simply change course at that point, the accumulated obstacles to change, in the form of the beneficiaries of current spending, by then may have become insurmountable.

At the same time, fiscal conservatives need not and should not direct their attack at deficits, as such. The best argument against much of what government now spends on is not that “we can’t afford it,” but that it is not a sensible use of public funds, on its merits. For too long, conservatives were content to let the deficit do their dirty work for them, with the result that when the deficit receded, the state resumed its relentless expansion.

Focus, rather, on first principles: on the purpose and limits of state and market, confining each to its proper role. Take that seriously and — dare I say it — the budget will balance itself.