James Buchanan, the problems with government debt, and a new Canadian poll

Economist and Nobel laureate James Buchanan warned about the dangers of government debt, particularly how it allows the cost of government spending today to be deferred to the future. As economists Donald Boudreaux and Randy Holcombe explain in their summary of Buchanan’s key ideas, (from the Essential James Buchanan):

The ability of current taxpayers to use debt financing to free-ride on the wealth of future generations led Buchanan to worry that government today will both spend excessively and fund too many projects with debt. Tomorrow’s citizen-taxpayers, after all, are not today’s voters. Thus, the interests of these future generations are under-represented in the political process.

Buchanan worried that government debt allowed the state to fund spending today that would not otherwise be supported by voters—and thus, not funded by taxpayers—if citizens today faced the costs of the spending, namely higher taxes. In other words, Buchanan was concerned that citizens would support government spending that they wouldn’t otherwise if they avoided the immediate costs of such spending, which he argued would lead to more spending and less effective spending. It was these types of concerns that led Buchanan to advocate for a constitutional requirement for balanced budgets and his general interest in the importance of the political rules of the game.

Buchanan also raised democratic concerns about deferring the costs of current spending (that is, future taxes) onto people not involved in the original decision to support spending today. In other words, the people in the future who will carry the burden of higher taxes from higher spending today don’t have a political voice in the decisions or elections today.

There are ample recent examples of such decisions where the current federal government introduced new or expanded programs without funding them today, choosing instead to borrow to defer the costs to the future. For instance, the expansion of the Canada Child Benefit, which provides tax-free payments to eligible parents with children under the age of 18, was financed largely by borrowing. This is a particularly interesting example since the higher income today for eligible parents (i.e. people with children) will largely be paid by those very same children in the future.

A recent poll commissioned by the Fraser Institute underscored the gap between support for government spending with no transparent costs versus less support for more government spending when costs are clear and current. The poll asked Canadians across the country for their support (strongly or somewhat) for three national programs: $10-a-day daycare, pharmacare and dental care for lower-income families. The poll then asked a second set of questions about support for the same programs but along with an increase in the GST to roughly pay for the estimated new program. The results demonstrate exactly what Buchanan worried about.

As illustrated in the chart below, support for all three national programs plummeted when respondents were asked about their support if the program was accompanied by an increase in the GST. When respondents were simply asked for their support for the three programs, the results show overwhelming support: 69 per cent for $10-a-day daycare, 79 per cent support for pharmacare and 72 per cent support for dental care.

But not a single program garnered majority support when a tax increase in the GST was attached to the proposed new spending—support fell to 36 per cent for $10-a-day daycare, 40 per cent for pharmacare and 42 per cent for dental care.

These results are in line with Buchanan’s worries about government’s largely unconstrained ability to finance new spending through debt, which effectively defers the cost of providing benefits today (i.e. spending) into the future. As Buchanan aptly explained throughout his career, to reverse and avoid such problems requires changes in the “rules of the game” rather than just changing the players.