This was originally published on 11/01/2009 on my former blog. As the jockeying leading up to new Federal and Provincial budgets unfolds, and the city continues to wrestle with whether it can accomplish anything capital in the face of its operating costs, I think these words are as relevant today (now that we’ve racked up a two year deficit of over $88 billion Federally, $40 billion in Ontario and a few billion in Toronto … and, on the global scale, all of this is chump change compared to the overspending in other countries.)
Conventional wisdom has it that governments must spend, spend and spend some more to dig the country — and the globe — out of the current downturn. (That having been done, the spending “cannot stop”.)
Conventional wisdom is dead wrong. All of this deficit spending will barely — if at all — make a difference in the near-term, and it will pile up problems not for the long-term, but for the medium-term: years in the middle of the next decade, at best.
A Little Bit Pregnant
First, let me say that I am not a deficit fanatic. I would like my government(s) to run balanced budgets: budgets that they expect to come in close to break even. Perhaps they have a good year and tax receipts are higher than expected? Then we have a surplus. Perhaps it was a tough year and receipts were lower? Then we have a slight deficit: exactly the same as the commissioned sales person or self-employed contractor who draws the same amount month after month for living expenses and could either end up with money left over as savings at year’s end, or has to dip into his savings to balance the books.
So a little red ink, from time to time, doesn’t worry me. In fact, it worries me far less than do massive surpluses because every line item, every department, every program has had contingency funds up the yin-yang. These are a recipe for bad decisions at the end of the fiscal year, otherwise known as utter waste, within the departments — and sloppy handouts, ill-thought-out programs and the like in the hands of politicians.
On the other hand, structural deficits — situations where the budget is planned to be in deficit annually (and where, as in the mess inherited from Trudeau and Turner by Mulroney, the deficit deepens annually as the interest pile up takes over everything) — are an incredibly stupid idea, on the same plane and of about the same moral quality as liar loans being written to create fees knowing they can’t be repaid.
Now, to be even-handed about this, none of our politicians are calling for a return to permanent structural deficit [although the Drummond Report strongly suggests Ontario has one, and the Parliamentary Budget Officer likewise that the Federal Government does]. No, all of them claim that we just have a crisis to solve now: we run up serious amounts of red ink for just a few years, and then we can return to fiscal prudence. So they say. (Already the promises have begun to spend money we don’t have — not to mention the whinges about attempts to cut, anywhere.)
But when was the last time a government program was terminated, its workers fired, its office leases broken, with not one penny more to be spent on that again, ever? I can’t recall one. I can recall occasional shrinkages — rare moments, those — but in general, once a department or Ministry has a mandate, it never gives it up, and it never stops funding it.
For every dollar of “stimulus”, some civil servant handles it. Someone else supervises them. Someone else manages them. Someone else develops policy for the effective use of the money — and they have supervisors, managers, directors, too. Someone else audits them, supports them technically, prepares their briefs to Treasury Board, procures their supplies. All of these have management chains, too. Every one of these increments becomes permanent, because pay grades are based on the number of people — and number of dollars under administration — associated with a job. So every new initiative does two things: it adds to the pile of spending that is “Ottawa”, “Toronto”, etc., never to be removed — and it siphons 20¢ of every dollar spent off the top to pay for itself (on average).
Now do you see why I believe any planned deficit is an almost automatic route to structural deficits? At the risk of offending people, the planned “stimulus” deficit is like getting pregnant. The plan is to abort the pregnancy. Instead everyone delays — there are so many reasons not to act — and the child comes to term.
You can’t be a little bit pregnant. You either are — or you’re not. When it comes to the dangers of structural deficits, “not” — don’t spend, by intention, beyond your means — is the best public policy course.
Deficits Avoid Decisions
Governments that say they’re making the hard decision to forgo all the hard work of sweating down the last structural deficit and to take action “as it’s needed now” miss the point. Choosing to run a deficit is avoiding the decisions that do need to be taken.
How many old programs — all those civil servants and their management trees, chasing ever smaller returns in their program areas — could be outright eliminated to find the funds required for your “stimulus”, if, indeed, it is needed. (That’s a separate question that has as much to do with vote buying as anything else. Another day, perhaps.) Yes, that’s the harder decision, for almost every one of those programs has some advocate in the country who will scream bloody murder if it’s touched in any way.
Nevertheless, MPs and MLAs/MPPs are elected for the express purpose of making decisions. If you don’t want the job, resign. (Regardless of party, voting your party line likewise is avoiding a decision. Each Member has a personal moral responsibility to decide issues on their merits. The House and Senate need far more Chuck Cadmans and far fewer trained seals.)
It would have been nice if we’d had a cap in place on spending ages ago: something along the lines of “Federal spending is, by law, not to exceed $5,000 per capita”. Budget growth then becomes a function of population growth. Otherwise, to start something new, you have to wind up something old. Perhaps the people who point at Olympic Gold Medals and demand more spending on amateur sport would be upset if the whole Department of Amateur Sport & Fitness (or whatever bureaucratic monicker it is using today) was summarily axed, along with all its spending, because GM and Chrysler need the money. But a cap would have trained our politicians to cut, and to do so regularly. At the moment they don’t have the habit trained. So they reach for deficits. It’s easier.
Why This Deficit Matters More than Previous Ones
There are many opinions out there today about what the future holds, and I’m not going to chew through all of them now. Suffice it to say there are three things on the immediate horizon that make running deficits a bad idea now — as I think you see, I think Trudeau-era deficits were an equal problem, but we had the time to fix that problem, and at the moment it doesn’t look good for the “ability to fix” this one out in the mid-to-end-2010s or 2020s.
You might remember Canada was the only G7 country running surpluses, and the only one retiring its national debt. This — and the price to get there was higher than it needed to be because of so many previous bad decisions (and so many bad ones made in reversing our disastrous structural deficit course) — was a benefit that would have made the 2010s and 2020s truly “easy street” for Canadians relative to other parts of the world. (Having given this up — and we wiped out all the gains of the past fifteen years in one year’s orgy of “stimulus” — we’re going to dig the hole deeper just trying to scrabble our way back up to balance, then live with that hole eating a hole in our pockets for years to come just to undo the damage of 2009.)
The three worries I have for the future are:
- The demographic bulge of the Baby Boomer generation is coming to “retirement”, and even with them continuing to work that work is likely to be part-time, both for personal reasons and as employers seek to reduce labour costs and revitalise their workforces. This reduces income tax receipts and employment tax receipts at the same time as pension demands increase. In other words, this was why we were working so hard to reduce the debt, knowing we were about to have a hole knocked permanently in government revenues. (Everyone who will work and pay taxes in Canada in the next twenty years is already alive, and we are singularly inept at maximising the return on our investment in immigration, aka “doctors and engineers driving cabs for a minimal income”.)
- Liveable Infrastructure
- This refers to the complex effects of energy costs on transportation, delivery, work and schooling, effectiveness of the housing stock, etc. Our current city-sprawl and choice to have goods — such as food — shipped thousands of kilometres so that we can enjoy the same diet year round is a infrastructure for living that probably is unsustainable into the future. That, in turn, implies spending a great deal of money to retrofit our human environment to deal with issues of affordability and cost, for it would be even more expensive to abandon what we have and build anew. What will be needed isn’t altogether clear yet, nor is how much of this must be done privately, what must be public:private in partnership, and where government intervention might be helpful. That it will need doing, though, is at the same level of clarity as a long-range winter forecast for cold and snow just about everywhere in Canada.
- Unsustainable Program Transitions
- This last refers to the entitlement programs already in effect in Canada — some federal, some provincial — that are slowly but surely eating us out of house and home. The public medical system in Canada, for instance, is in decay in most provinces, while simultaneously chewing through one dollar in two of the provincial budget (or more). Eventually the combination of decay, delisting of procedures and reductions in service capability that have been the norm ever since the provinces restricted medical school enrolment coupled with Paul Martin’s balancing of the Federal budget by slashing transfers to the provinces in the 1990s will bring the system teetering to the point of collapse. Throwing more money at these systems is probably not the answer; figuring out how to restructure the entire system is — but the longer we wait to tackle these hard questions, the fewer options we’ll have and the more likely we’ll toss money we don’t have at the time at the problem. After all, the auto makers wouldn’t have “needed” a handout now if they’d tackled their problems a decade ago.
All three of these argue that at some point in the next few years the Government’s freedom of manoeuvre will be deeply curtailed. Balanced budgets en route to that point would ensure we continued to hold the line on interest expenditures (which, as with our own personal budgets — a $10.00 pizza bought on a credit card at 24% interest and paid off by minimum payments turns into an over $220.00 pizza by the time it is discharged — is a pure waste of money). Practice at real decision making rather than sloughing the problem off into deficit spending would prepare the way for much harder decisions to come.
Oh, and I haven’t yet noted that the next years are likely not to be growth years. Indeed, except for the twentieth century, the norm in economic life is a balance of inflationary (growth) and deflationary (consolidation) years. After a sixty year continuous inflation, we should reasonably expect at least a decade-long deflationary consolidation. Instead, central bankers and politicians around the world think just slopping cash around in as many forms as possible will allow us to escape back to the abnormal conditions from 1945 to 2008. Bad thinking, at least from this student of economic history’s point of view.
So there you have it. These are the arguments for not going into deficit. Such a move robs our future, impoverishes our children, and probably is like standing, in the grand tradition of Canute, in the way of the tide. But there are few moral thinkers in Parliament today. Instead, I expect the calculation of votes, the bribing of we citizens with our own money, the unrighteous indignation of most days in the Commons and the subordination of the strategic to the tactical to continue.
Remember all of this as you whinge. You are robbing your children and your grandchildren of their future. How you will face them depends a lot on whether you’re willing to make hard decisions now — and insist your MP and MLA/MPP do the same.