Deficit spending? Be afraid. Be very afraid.

Government stimulus plans in Canada have a history of getting rapidly off track

Andy Clark/Reuters

Andy Clark/Reuters

Last month William Scarth, an economist at McMaster University, wrote a paper calling for the Harper government to delay its deficit reduction plan by three years in order to spend money to bring down unemployment. To which Joe Oliver, ever on the lookout for radicals, blew his lid. “Our government will not open the taps on reckless spending. We will not go down that well-trod and irresponsible path to economic decline.”

Only, Scarth is hardly a big government-loving NDP stooge. For one thing, his paper was published by the conservative C.D. Howe Institute, albeit with a title that included the humorous disclaimer, “User discretion advised.” And in the early ’90s he was front and centre calling for deep cuts to get Ottawa’s books in order.

Scarth is also just one in a line of fiscal conservatives saying rather fiscally un-conservative things of late. A month earlier David Dodge, whom no one would describe as reckless or irresponsible, had much the same advice for Ottawa. With interest rates as low as they are right now, Dodge wrote in a paper, “fiscal prudence does not require bringing the annual budget balance to zero almost immediately.” Instead, he argued, deficit spending on ports, bridges and transit systems now would boost productivity and make Canada more competitive in the long run.

Then this month David Rosenberg, the chief economist at Gluskin Sheff + Associates and a favoured commentator on business news channels, chimed in to say Canada needs a “sizable positive fiscal shock” to promote growth. Rosenberg prefers tax cuts, not increased spending, but the effect would be the same—a higher deficit at a time when Oliver and his boss have pledged up and down to balance Canada’s books ahead of the 2015 federal election.

Let’s be clear, despite Oliver’s over the top tone, none of these guys are calling for the type of runaway budget deficits that characterized federal finances in the ’80s and early ’90s. With Canada’s economic growth slipping into lower gear even in the face of extremely loose monetary policy, it’s tempting to think Ottawa could fix everything if it would only pry open its stingy fingers a little bit. Indeed, all three men have been reasonable and careful in their arguments, stating that any increase in deficits should be short-term and focused.

It’s wonderful in theory. If only Canadian governments had a history of restraint and judiciousness in fiscal matters to convince us that they would limit that spending to the prudent and necessary infrastructure projects the country needs. Instead, time and again, we’ve seen stimulus programs exploited for crass political gain with little benefit to the economy.

The all-too-easy example would be Ontario, which has pursued deficit spending for years, always with the promise of belt-tightening to come, and growth has remained completely elusive. (For his part Scarth made clear that his argument for increased deficit spending doesn’t apply to Ontario.)

But you really don’t have to look any further than the current federal government’s stimulus program in 2009 to see how easily it can go off track. With his political fate at risk, Prime Minister Stephen Harper abandoned his convictions on deficits and oversaw the sharpest increase in the deficit relative to the size of the economy in the postwar era. Yet despite his pledge that his government’s stimulus plan would include the “largest infrastructure renewal effort in this country in over half a century”—the average size of projects in the Infrastructure Stimulus Fund was less than $3 million. Sure, lots of potholes got filled and roadways paved, but you’d be hard pressed to cite any nation-redefining infrastructure legacies. What we got instead were handouts to business, loads more snowmobile trails in Quebec and investments in “cultural” and “sports” infrastructure that made for great photo ops for local Conservative MPs.

It still isn’t even clear that stimulative public investment campaigns of the type some economists would like to see would even work. This week the International Monetary Fund published a paper examining public investment “booms” in 21 countries going back several decades. The evidence showed that after an initial short-term boost, growth slowed considerably. The authors found that “big pushes” in public investment in pursuit of growth resulted in poor and rushed decisions on which projects to fund. The increase in debt loads also tends to cause drags on future growth. At the same time, poor public investment decisions crowded out private sector investment. “Major public investment campaigns continue to be advocated in several countries as a major trigger for economic growth,” the paper states. “On this issue, whether they have in fact triggered growth, the evidence for a positive effect of public capital on GDP or GDP growth is weak.”

So Oliver is right to warn against another plunge into deficits now. The question is this: with our workforce aging and our heavily indebted households just now beginning the long process of deleveraging, economic growth is going to be hard to come by. Will Oliver and Harper be able to resist that urge to splurge by going back into the red next election year? Don’t bet on it.




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