GOOD POLITICS BUT QESTIONABLEPOLICY-A FEELING OF DEJA VUE
In the October 16th Speech from the Throne, the Government announced its intention to introduce legislation, requiring “balanced budgets during normal economic times and concrete timelines for returning to balance in the event of an economic crisis”. No details or explanations were provided.
Mr. Flaherty’s November fiscal Update made no mention of balanced-budget legislation. However, given recent comments by Mr. Flaherty of a “bare-bones” budget for 2014, the highlight of the 2014 Budget could very well be the specifics of such legislation. Based on past practice, however, we probably won’t know the full details until the budget omnibus bill in June.
In an earlier article on the Speech from the Throne, we raised a number of questions on what this legislation would look like and how it would work. In the absence of any justification or specifics, a key question is why would the Government want to introduce such legislation?
No balanced-budget legislation has ever existed for the federal government. It probably would not have made any difference in the 1980s. Mr. Martin felt he didn’t need it in 1995 and until now Mr. Flaherty has not needed it. Both Liberal and Conservative governments were willing to take the actions necessary to eliminate the deficit. So what is Mr. Flaherty’s problem? What is this legislation supposed to prevent and is there any evidence that it might actually work?
Since 2006, the Harper Government has set a number of fiscal targets, none of which have been met. To be fair, none of these were set in legislation. If these targets had been embedded in legislation would this have forced the Government to make the necessary adjustments to ensure that the targets were met? Not likely.
A study conducted by the Department of Finance in 2001 examined fiscal rules in a number of countries at the national and subnational level and concluded that legislative fiscal rules are not necessary for achieving a balanced budget. In the aftermath of the 2008-2009 recession, many countries had to modify their legislative fiscal rules given the undue burdens that would have been placed on them. In addition, recently both the IMF and OECD have recommended more emphasis on strengthening domestic demand and less emphasis on strict adherence to unrealistic fiscal rules. Neither the IMF nor the OECD or anyone else is recommending that Canada adopt balance budget legislation. Indeed Canada is used as an example of a country, which took tough fiscal actions when necessary, without legislative fiscal rules.
Legislated fiscal rules reflect the view that elected governments are incapable, or unwilling, to take the politically unpopular decisions necessary to maintain a sustainable fiscal structure. During economic slowdowns, automatic stabilizers, along with discretionary policy actions, result in deficits. However, during good economic times, surpluses are seldom allowed to accumulate to reduce the public debt. Instead, these surpluses are used to introduce new programs, expand existing ones and/or cut taxes, resulting in ongoing structural deficits.
For example, in 2006 the Conservative government inherited a surplus of $14 billion. Instead of using it to reduce the federal public debt, the government used it to cut the GST by two percentage points, thereby creating a structural deficit in advance of the financial meltdown in 2008.
To the extent emerging surpluses are directed to increasing spending, they result in larger governments. Fiscal rules are an attempt to counter this behaviour, by “forcing” governments to tax and spend within fixed fiscal constraints.
The success of fiscal rules – legislative or not - depends on the government and whether it is willing to adhere to the constraints imposed by the legislated fiscal rules. Where the political will is lacking, compliance with legislative or self-imposed rules will be weak and the fiscal rules will not be binding. Experience has demonstrated that “loop” holes will be found or the legislation will simply be ignored or changed.
If Mr. Flaherty had done his research, he would have found that attempts to implement balanced budget legislation have in the large majority of cases failed miserably. This has certainly been the case in the U.K and the EURO area and for most provinces in Canada. Fiscal rules only work when the political will is there and the government wants them to work. However, if the political will is there, why are legislated fiscal rules necessary? Mr. Martin didn’t need them and, until the Speech from the Throne, Mr. Flaherty felt he didn’t need them either. So why is the Conservative government proposing them now?
The reason is simple. Prime Minister Harper and Mr. Flaherty feel that they need to resurrect their “reputation as good fiscal managers” prior to the 2015 election. Their reputation has been suffering recently and they feel they must reassure their Conservative base of their commitment to Conservative fiscal principles and to smaller government. Balanced-budget legislation would serve these purposes.
In the 2006 election, the Conservative Party proposed the creation of an independent Budget Office to oversee the government’s finances. Everyone bought into this message of transparency and accountability. But we all know what happened to the government’s commitment to accountability and transparency once the PBO was created and began to do its job.
The same will be true for balanced budget legislation. It will play well with the Conservative base during the 2015 election by forcing the Opposition parties to support it, or waffle around it. Either way, the Conservatives will accuse the Liberals and the NDP of wanting to tax and spend, and to create “bigger” government.
Perhaps the Government will propose the creation of a Parliamentary Balanced Budget Officer (PBBO) in support of transparent and accountable budget making.
Stay tuned for the Budget Omnibus Bill