Running the occasional deficit okay, says the C.D. Howe Institute

Remember the battle cry of the former federal government that it will avoid deficits “come hell or high water?” The C.D. Howe Institute is calling for an end to that practice, saying it has resulted in massive in-year spending hikes at the expense of long term planning.

The conservative think-tank says the practice has resulted in so many large surpluses that it has undermined the credibility of budget projections and the government. William Robson, who penned the report, points out that eight of the last ten federal budgets since 1995 have exceeded projections.

The practice of avoiding deficits at all costs, started by then-finance minister Paul Martin in 1995, has succeeded in ending the unsustainable borrowing on the part of the federal government. By adopting this approach, the federal government was able to turn a $36.6 billion deficit in 1994 and 1995 into a surplus of $20.2 billion by the 2000-2001 fiscal year. Combined budget surpluses over the last five years total $34.0 billion.

But the C.D. Howe Institute says many of these surpluses were the result of overly cautious and misleading numbers, which has allowed the federal government to spend more on programs than the budgets forecast. In many of these instances, the report argues, MPs and their constituents had no chance to debate these increases or push for alternatives like tax relief.

“Advocates of tax relief were told repeatedly that Ottawa could not “afford” significantly lower taxes on middle and lower-income Canadians,” argues Robson. “That claim is hard to square with the more than $27 billion of in-year spending increases that occurred over the past five years.”

Instead of the hell-or-high-water budgetary framework, Robson advocates a fiscal framework that allows for some uncertainty and even the occasional deficit. The alternative he suggests to the federal government is a path for taxes and spending that offers comfortable odds of achieving benchmarks such as a lower debt ratios or no more than one deficit during a given period.

“Such a framework,” he writes, “would reduce the embarrassment of small deviations from annual targets and the associated temptation to make last-minute changes in spending to hit them.”

So what are the odds the conservative government will have a different tack on deficits? It’s too soon to say, but Canadians should get their answer sometime this April.

Filed by Mark Brown, Advisor.ca, mark.brown@advisor.rogers.com

(03/29/06)