Canada's red-ink budgets: 45 of the last 65 years

Ever since the last recession, Canadians have been informed by pundits and the political class that stimulus spending—perhaps better labelled as “binge” spending—was critical to Canada’s economic recovery.

But extra government spending had little to do with Canada’s exit out of the recession. The recession ended in mid-2009; it was only about then that federal and provincial governments started spending extra (borrowed) stimulus cash.

To credit stimulus spending for the end to Canada’s recession, one must argue that extra dollars mostly spent after June 2009 somehow magically rescued the Canadian economy before June 2009. Right. Only if one believes in budgetary time travel.

All the borrowed money did have this effect: it added to the large federal debt mountain already in place. The federal debt will hit $614 billion in 2015, up from $457 billion in 2008. Such debt resulted from the decades-long practice by governments to transfer wealth from future generations—by chronic borrowing—to pay for current needs and wants.  To wit, it is in that context that the 2012 federal budget should be placed and graded.

The federal Conservatives now forecast balanced federal books by 2015. That is six years after the 2009 recession ended. In contrast, in the 1990s, Prime Minister Jean Chretien’s government reformed spending rapidly; it is why Liberal budgets went from red to black ink in just three years.

Regrettably, with that Liberal-era exception noted, federal and provincial governments have long preferred to run deficits.

Since 1947(as far back Finance statistics go on such matters) and to 2012, the federal government has recorded deficits in 45 of 65 years—two out of every three postwar years on average. In the provinces, a comparison is unavailable before the mid-1980s, but the pattern is clear: Over the last 26 years, the provinces have collectively run up deficits in 19 years, or about four out of every five years.

Problematically, among several negative effects, such borrowing creates interest payment obligations that take tax dollars away from other private and public possibilities for such money.

The chronic red ink cannot all be blamed on economic downturns. Since the Second World War, Canada has experienced eight recessions, most lasting less than a year. Also, in case, anyone thinks higher taxes would have solved Canada’s deficits over the decades, consider this fact: federally, red ink budgets were the norm even when taxes were historically high as a percentage of the economy (the 1970s and 1980s). Conversely, surpluses coexisted with tax levels that took up less of the economy (in the later 1990s, and in the first part of this decade).

Sure, extraordinary events such as recessions, depressions and wars severely restrict fiscal choices. But those factors are not in play most years. So when balanced budgets show up, they result from politicians—and as the 1990s demonstrated, with significant public, media and bureaucratic support –who commit to make government affordable. After 1994, the Chretien Liberals—with much pushing from Preston Manning and the Reform party—purposely decided not to hand invoices for even more debt to the next generation.

The federal Tories are only the latest example of a government unwilling to make political choices in favour of future generations, though I grant that on old age security and perhaps on parliamentary and public sector pensions, they hint at baby steps in the right direction. 

Still, to give a concrete example of how chronic deficits and the accumulated debt has already foreclosed many options, consider current interest on the federal debt— $31 billion this year alone.

Contrast that figure with the $40-billion Ottawa spends annually on the elderly (including old age security payments and other expenses). On the revenue side, the federal government forecasts it will collect $125 billion in personal income tax and $32-billion in corporate income tax.

So ponder this: If Ottawa hadn’t run deficits so often, payments to the elderly could be 78 per cent higher. Alternatively, every Canadian who paid personal income tax could pay 25 per cent less in federal income tax; or federal taxes on business could have been eliminated (ask yourself what that might have done for job creation).

Not all budget choices are created equal and I use these examples merely as illustrations. Here’s the point: Future historians will wonder how Canadians in the last half of the 20th century and first decades of the 21st justified racking up so much debt for upcoming generations. They will wonder why current citizens and their politicians knowingly restricted so many options for those younger families.