In the second of my two part series of columns in defence of balanced budgets I respond to my critics on the Globe comments page. They were incensed by my argument in Part I of the series that the stimulative effects of Paul Martin’s drive to balanced budgets in the 90s were in any way relevant to today. “That was then, this is now” was there rallying cry. The economy is underperforming and only deficit-financed stimulus can get it back on track.
My reply took several forms. First, I argued that if the Martin example was not relevant because conditions had changed then we should look at the results of the Ontario government’s fiscal policies today. After all they have been running deficits much larger in relative terms than what the new federal government proposes for several years. If they hold out the promise of stimulus for the nation in today’s circumstances we should see strong evidence of that effect in Ontario. Instead we find, well, one of the national economy’s underperformers.
Then there is the whole argument that the national economy is in fact underperforming, and that therefore stimulus might “shock” it back onto a higher growth path. Here I cite the most recent work of the OECD shoing that Canada’s “output gap” (the gap between its actual performance and its theoretical potential) is quite small (a mere .5% of GDP) and that they forecast that it will have more than disappeared in 2016, long before any stimulus spending could have had any effect. The OECD predicts that the next 2 years will see inflation pressures building in the national economy, likely leading to interest rate rises. Kiss the stimulative effect of the federal borrowing goodbye.
Finally I go through yet again the argument why politically it is exceptionally easy to start down the road of deficit financing, but the reverse gear is extraordinarily difficult to find and requires huge strength to engage.
This Economy Lab column appeared in the November 27th edition of the ROB in the Globe and Mail.
