One sip of that deficit punch can make us all addicts

If the Tories had done what Martin failed to do, we’d be looking at a $13-billion surplus

“Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”

—Mr. Micawber

Well, no, it doesn’t work that way: not for governments at any rate. The news that the federal government will soon return to deficit, something the Conservatives stoutly denied all through the recent election campaign—gosh, what a surprise—is hardly cheering. But it does not quite spell the difference between happiness and misery.

The fate of the nation does not hang upon a swing of a shilling this way or that, or even a few billions. We do not all turn into pumpkins the moment revenues fall short of expenses. The fiscal calamity that befell this country through the ’80s and much of the ’90s did not come upon us because we ran a deficit, but because we ran 27 of them. In a row.

The gloomiest current forecast puts the deficit for the next fiscal year—most experts predict we will remain in the black this year—at $10 billion, with smaller shortfalls expected from there on. That sounds like a big number, but relative to the economy, it’s still just 0.6 per cent of GDP. The deficit was never less than one per cent of GDP in all of those 27 lost years. For most of that time it was greater than three per cent; some years it was as high as eight per cent.

And, unlike in those dark days, the government remains in operating surplus. We’re still taking in roughly $6 in revenue for every $5 in program spending. It’s the costs of paying interest on the debt—on all those past deficits—that will drag us back into the red. But only temporarily: the fiscal momentum implied by those operating surpluses is hard to overcome.

All the same, the road to perdition starts with a single step. The reason we should want to avoid falling back into deficit is not on account of the ill effects of a single year in the red, or even two, but for fear that it will prove habit-forming: like a recovering alcoholic, we should be wary of taking even a single sip of the deficit punch, or risk waking up 27 years later with a hangover the size of the national debt. It may be an irrational taboo, but as irrational taboos go, there’s much to be said for it.

If we are to escape that fate, it’s best to understand how we got here. I note the former prime minister Paul Martin has emerged from the crypt to damn the current government for “gutting” the surplus, blaming in particular its decision to cut two percentage points off the GST. There’s lots wrong with the GST cuts, but the alarming deterioration of the government’s fiscal position isn’t one of them. If we should fall back into deficit, it won’t be because of any shortage of revenues, but because of a near decade-long orgy of spending—one for which Martin can take his share of the blame.

It was in the 2000 budget, the deficit vanquished but memories of it still fresh, that Martin promised to hold future increases in spending to no more than the rate of inflation plus population growth—“the benchmark used by most economic commentators”—or about three per cent per year. Yet hardly had he issued the pledge before he broke it. Program spending that fiscal year jumped by nearly $12 billion, or 10 per cent, twice as much as forecast. This was followed by increases of five per cent, eight per cent, five per cent, and an astonishing 15 per cent in 2005. The Conservatives followed with increases of seven per cent, six per cent, and four per cent—again, well in excess of the inflation-plus-population growth standard.

It is worth considering where we would be today, had governments of either party stuck to the not-terribly-exacting standard of fiscal discipline Martin promised in 2000. The nearby chart tells the tale. Had program spending been held to 2000 levels in real per capita terms—that is, allowed to increase by no more than inflation plus population growth—it would today be just $165 billion, or some $43 billion less than currently projected.

Perhaps that’s too much to expect. But even if the incoming Conservatives had done what Martin failed to do—if they had merely held real per capita spending to 2006 levels, locking in the increases of the Martin years—we would today be looking at a surplus in excess of $13 billion, even after the expected decline in revenues. That would be more than enough cushion to ride out any economic slowdown without falling into deficit, with billions left over for confidence-boosting tax cuts.

It wouldn’t have taken much, in other words, to avoid this fix: just a modicum of fiscal discipline. But they couldn’t manage even that; as fast as the revenues gushed in over the last eight years, governments spent it faster. Finance ministers of whatever stripe have consistently operated on another of Micawber’s principles: “something will turn up.”

Yet even at this late date, it would be enough to hold real per capita spending constant to return us to surplus after one or at most two years. It took many years of bipartisan fecklessness to get us into deficit, but it would only take a teeny little bit of resolve to pull us out. Not quite “ask not” as stirring calls to action go, but it will have to do.

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