Friday, October 24, 2008

Deficit Spending - Thoughts

With renewed speculation that the Federal government will run a deficit this year, I thought I'd spend a few moments discussing where I land on the subject - because it's not as cut and dried as "Deficit bad, Surplus good", as has been common mantra in recent years.

Let me start out with a review of the terminology - in part because here in Alberta, people have long since comingled the ideas of debt and deficit.

Debt: is the money that the government owes to various lenders from whom it has borrowed to finance various aspects of its operations. Sometimes, debt is a necessary thing - usually to finance assets which have a fairly long life (e.g. buildings, roads and other infrastructure) - paying that down over the first phase of the asset's life (before maintenance becomes an issue), is just fine - little different actually than the mortgage most of us carry on our homes for some period of time.

Deficit: is a different proposition. Deficits are what happens when the government borrows to finance its day to day operations. Probably the best way to look at a deficit is to consider it as similar to credit card spending. If you can pay the card off every month, you don't have much of a problem. Start carrying a balance, and suddenly you are compounding that balance into your overall Debt picture.

That doesn't mean that the credit card debt is necessarily bad. For example, your furnace in the house dies during a cold snap in the winter. It costs you a few thousand to replace it which you slap on the Credit Card to cover the cost now, and perhaps you flip the credit card balance to your Line of Credit at the bank at the end of the month, knowing that you just don't have that extra $4000 lying around to pay off the furnace.

Did you incur a deficit for that month? Yes. Did it compound your debt? Yes. However, it was also a necessary purchase to keep your home livable, right? That isn't such a bad thing. If, however, you are incurring a credit card balance every month because you are overspending on dinners out and going to movies, you have a more serious problem - because the costs will continue to occur unless you take specific steps to change your patterns.

Government has a somewhat trickier balance to maintain than most of us with a mortgage and a few credit cards. Government spending exists on multiple levels, and cannot simply be blindly cut without understanding what is being cut. For example, cutting EI spending dramatically during a downturn is actually a very destructive thing to do, especially during a time period when demand on that program will very likely escalate.

The challenge that the government faces in these times is deciding where cuts can be made with a minimal negative impact upon the citizenry of the country - you know - the same people that pay the taxes that fund government in the first place. So, how deeply do you cut before real damage is being done to the country? What is important to maintain, and what is simply an unnecessary burden on the country?

The balance is not trivial, although I suspect that the way the HarperCon$ are going, any cuts made will be excessively damaging not just to Canada, but to Canadians as individuals.

The finance minister will keep his post in the upcoming cabinet shuffle, insiders say, and they insist he remains hawkish on balanced budgets even if others are starting to resign themselves to red ink.

They say Flaherty has three ways to stay in the black.

The Tories can cut program spending. They can scale back future commitments - reducing the scope of the tax-free savings accounts created in the last federal budget, for instance. And they can freeze public service hiring.

There's an obvious area we could cut back our spending - Afghanistan. However, I doubt very much that Harper will do that. The typical neoCon line is all about making authority structures bigger, and more aggressive - whether that is the military, police or prisons.

Unfortunately for everyday Canadians that means that the Con$ will be going after the programs that benefit them on a day to day basis - health care, EI, and others that the Con$ typically argue are all about 'poor judgment' and 'individual irresponsibilty'.

A certain amount of deficit spending to keep important government functions and programs running is reasonable over the short term - especially when the world's economy is so volatile, and government revenues are therefore similarly unpredictable.

Using deficit spending as a club is neither productive, nor useful - unfortunately, I suspect that is exactly what we'll see in the House of Commons when it next convenes:

"(Harper) will be able to have a deficit and take no criticism for it. Who's going to criticize him for going into deficit when you get their buy-in first?"

A Conservative MP made it clear what political tack the government would take if forced back into the red. When asked whether he expected a deficit the MP smiled and replied: "Only if the opposition agrees."

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