It’s not unusual for scientific progress to spark a frightened reaction from those whose long-standing beliefs are threatened by it. Galileo showed the Earth orbited around the sun — and was jailed by authoritarians who rejected the political implications of his discovery. Zealots trying to suppress stem-cell research provide a modern-day parallel.

Economics, of course, has its own religious doctrines, and its own high priests. And economic inquiry can encounter similar responses from those with a devout bone to pick.

The Galileo of our story is Tim O’Neill, one of Canada’s most respected economists, who recently tabled a detailed review of how the federal government prepares its budgets. Mr. O’Neill was tapped for this job last year by Finance Minister Ralph Goodale, who was on the hot seat after booking yet another “surprise” multibillion-dollar budget surplus. Nobody believes official budget projections any more. So Mr. Goodale asked Mr. O’Neill to examine the methodology and recommend reforms.

Mr. O’Neill found that Ottawa’s budgets have incorporated consistently conservative assumptions at every step — including underestimating revenue, overestimating interest costs, and overestimating program spending (this latter error was often offset by in-year spending announcements that soaked up some of the underlying surplus). Charitably, he doesn’t view this consistent conservative bias as nefarious. Rather, he suggests, “the current fiscal rule of ‘no deficits’ created incentives ….. to incorporate extra [implicit] prudence.”

Mr. O’Neill’s sensible answer: To produce budgets aimed more neutrally at the official budgetary target (rather than several billion dollars to one side of that target), the government should simply abandon its near-holy commitment to never run another deficit again.

The government’s bottom line naturally rises and falls with the tides of the broader economy. A recession can quickly knock the bottom right out of a budget: The recession of 1981-82, for example, reduced the government’s fiscal balance by over $13-billion in a single year. To make sure this never drives the government into the red, even temporarily, the budget must be padded (explicitly and implicitly) with many billions of dollars of excess funds each year. In turn, this produces annual budget “surprises,” erodes the credibility of fiscal projections, and inspires chronic ad-hoc behaviour in how the resulting surpluses get spent.

So, Mr. O’Neill suggested the government abandon its pledge to never ever run another deficit again. Such a pledge is not economically necessary: Canada has the lowest debt burden of any major industrial country, and could easily tolerate a temporary cyclical deficit. In fact, trying to prevent that deficit during a slowdown would require spending cuts or tax increases, making the recession worse — the fiscal equivalent of bleeding a sick patient with leeches. The main issue is to make sure that a cyclical deficit is temporary (rather than morphing into a permanent structural deficit, like we had in the 1980s).

The economic logic behind Mr. O’Neill’s suggestion is unassailable. Politically, however, it is the fiscal equivalent of suggesting the Earth revolves around the sun. Mr. Goodale, who commissioned the study, immediately dismissed the idea. Conservative finance critic Monte Solberg, Parliament Hill’s deacon of fiscal conservatism, went further: “This is crazy talk,” he told reporters. Fiscally conservative politicians have wrapped themselves for a decade in the pious mantle of prudence. And here comes an economist — from Bay Street, yet — telling them to take it off.

Let’s be clear. Mr. O’Neill was not exactly suggesting that the spending taps be turned wide open. He has proposed replacing one narrow rule (never run a deficit again, so help me God) with a somewhat more flexible but still conservative one (run a surplus over each cycle, and hence reduce the debt burden over time — perhaps to as low as 15 per cent of GDP). For my tastes, he still ascribes way too much value to ongoing debt reduction.

Nevertheless, his central point — there’s no useful economic purpose to pledging to never again run a deficit — is 100-per-cent valid. It puts the boot to the “balanced budget” laws that were popular for a while (and which aren’t worth the paper they are printed on — as the former Tory government proved, the hard way, in Ontario).

If we experience a recession, we should tolerate a deficit. In fact, we should embrace one. It’s a natural feature of economic adjustment. I can assure you, the sun will still rise the next morning. (Well, actually, the sun doesn’t rise: The Earth rotates around it.)

Jim Stanford

Jim Stanford is economist and director of the Centre for Future Work, a progressive labour economics institute based in Vancouver. He has a PhD in economics from the New School for Social Research in New...