The deficit card

Newly elected NDP premier Darrell Dexter was reported as being concerned about the size of the Nova Scotia government deficit.

We all know, when the economy goes bad, two things happen to public finances: revenues go down and expenditures go up. The result is inevitably a deficit.

What we have to fear from deficits is that they will be used to manipulate public opinion, and scare governments into the doing the wrong things: cut spending and postpone needed projects.

Canadian CCPA Monitor Editor Ed Finn calls deficits the all-purpose excuse. Bank economists, editorial writers and business commentators warn us against the sin of spending money we do not have. Instead, they call for fiscal "responsibility," as if to ask, who could be against that?

It is particularly galling to hear NDP governments, and would be governments, spout the deficit argument and then cut spending, or abandon public projects. Presumably, they know better, but have decided to bow down to the powerful monied interests behind the faulty reasoning, rather than take on the deficit argument in public dialogue and debate.

No government leader wants to speak out publicly knowing in advance they will take a pasting in the press. This is especially true of a new premier. But, no NDP leader wants to act against the interests of the citizens who elect them either.

What follows are some reasons for political leaders to speak out in favour of public spending, even if it means a deficit.

1. The problem underlying poor economic performance is not the deficit, it is rising unemployment. The late Rueben Bellan, a prominent economist at the University of Manitoba researched the link between unemployment and the deficit. When the unemployment rate was low, no governments ever had deficits. Why? When more people are working revenues (income tax receipts, sales taxes) go up, and expenditures (E.I., welfare) go down. It follows that governments should aim to reduce unemployment, not the deficit; remembering that cutting spending makes unemployment worse.

2. Government spending is of two types, capital investments in bridges, roads, schools, hospitals, theatres, hockey arenas and current expenditures to run programs using these capital assets. All governments should divide their spending and revenue accounts according to the current/capital distinction, and keep them separate. Funding the capital budget through borrowing always makes more sense than trying to pay cash now for projects that give rewards over many years to come. In a recession, low interest rates make additional capital spending more attractive than ever. Capital spending by governments produces returns in health, education, research, parks, recreation, culture and transport. Why deprive citizens of these benefits?

3. Once capital spending is separated out of operating spending, the true deficit becomes apparent. At this point the government must ask the following question. Is the economy growing or lagging? If the economy is growing there is no reason to increase operating spending other than to spend the additional tax revenue available from a growing economy. If the economy is slowing, the government should undertake new spending to keep things from getting worse. In the present calamity, every major government in the world has committed itself to this course of action. Governments that fail to act are rightly accused of trying to ride on the back of others.

4. Most arguments used to oppose public spending say deficits spook financial markets. It is true that when interest rates are higher than economic growth, the increases in yearly interest costs on outstanding debt are going to be higher than the additional revenues from growth. However, this is an argument for increasing the growth rate, not for decreasing it through cutting spending. High interest rates well into the high teens (18 - 19 per cent) such as prevailed in the 1980s did increase debts and subsequently deficits considerably. Currently official interest rates are nearly zero. The Bank of Canada target rate for overnight loans is one-quarter of one per cent. So if the economy grows by more than that the costs of borrowing, interest charges go down and new borrowing becomes less expensive.

5. Pension funds, banks and other institutional investors are looking for secure investments, and no investment is more secure than a government bond.

6. In a recession, it is never true that when governments borrow they drive up interest rates, or crowd out private borrowers, or force bond market services to downgrade the provincial debt. It is always true that slow growth or no growth economies benefit from additional spending. Programs that increase employment most are best.

The people who voted NDP in Nova Scotia know the source of economic wisdom on the deficit is not limited to people who have money, whether they make it, inherit it or manage it on behalf of others. The new government knows the truth about the economy lies in a constant dialogue, a public conversation, exchanging ideas among citizens. Making economic policy-making an open process should be the goal of the Dexter government. Not being fooled by the deficit card is an important part of making Nova Scotia a better place for all.

Duncan Cameron writes from Vancouver.

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