The punchline, of course, was the Finance minister’s vow to introduce balanced budget legislation, to fulfil a commitment made in the September 2013 throne speech. It’s a bad, bad idea — but that’s not what made it funny.
No, what made it funny was the fact that a government which hasn’t recorded a single surplus in seven years, which has ramped up the federal debt by $150 billion, is now promising to pass a law against … what it’s been doing since it was first elected. Hysterical.
Before we start talking about the problems with balanced budget laws in general, let’s talk about what the Harper government has in mind. This is a government which routinely passes laws not to solve problems, but to send messages. Take a look at its record in criminal law: a lot of changes to sentencing that aren’t likely to withstand constitutional challenges, but which still send the message that the government is ‘tough on crime’.
A promise of balanced budget legislation will be part or Mr. Oliver’s debut budget. What are the chances of a bill actually being passed before summer recess, and the election? Low enough to be negligible. But since this bill is meant only to send a message to Conservative supporters who have gotten sick of the government’s sloppy fiscal record — and to give the PM something to smack Justin Trudeau around with during the pre-campaign — it really doesn’t matter if the bill ever passes.
Which is is just as well. Balanced budget laws result in bad fiscal policy. Wherever such laws have been tried, they’ve failed, for one simple reason: They’re impossible to enforce.
In most jurisdictions where deficits emerged despite laws ‘outlawing’ them, politicians just ended up amending the laws, scrapping them altogether or adopting creative accounting practices to turn red into black. In short, when cornered by their own budget laws, politicians cheat. A study conducted by Mr. Oliver’s own department concluded that zero-deficit laws are largely ineffective in cases where politicians lacked the political will to balance budgets — and unnecessary in cases where they have that will. The Harper government certainly hasn’t demonstrated that kind of political will so far. A balanced-budget law won’t change that.
In his speech, Mr. Oliver stated that the only deficit his balanced-budget law would consider acceptable would be one that results from a recession, or an extraordinary circumstance (like a war or natural disaster) with a cost exceeding $3 billion in a year. Within 30 days of a published deficit, the Finance minister would be required by law to testify before the Commons Finance committee and present a plan to return to balance. That plan would include an automatic freeze on operating spending and a five per cent cut in the salaries of cabinet ministers and deputy ministers until the budget is balanced again. Departments that helped create the deficit would see their budgets cut.
But recessions never end quite on schedule. The Harper government has posted deficits in every year since 2008-09. The deficits in 2008-09, 2009-10 and 2010-11 were definitely due to the recession and the stimulus measures implemented. But what about the deficits recorded in the following years — when the economy was technically out of deficit but still too sickly to provide the kind of revenue growth that would have lifted Ottawa into the black?
Would those late-game deficits have to be offset by spending reductions under Mr. Oliver’s rule, despite the economy’s fragility? Would there be an automatic freeze on departmental operating budgets and salary reductions for ministers and their deputies? Who decides when a recession ends? Should only structural deficits be outlawed? If so, who decides if a deficit is caused by structural factors and by how much?
And what qualifies a circumstance as ‘extraordinary’? Wars, floods, tornadoes — those seem obvious enough. But what about another threat to central Canada’s automative sector? Would another $14 billion bailout qualify as a legitimate government response to an ‘extraordinary’ event?
According to Mr. Oliver’s rule, the first $3 billion of any deficit, regardless of its cause, would have to be offset by spending reductions. This would be like lobbing a hand grenade into the machinery of government.
Departments would be hit constantly by operating budget freezes, making planning extremely difficult. Government departments are appropriated funds by Parliament. The ‘lapse’ — the difference between the amount spent during the year and the amount appropriated, which is returned to general government revenue — has increased significantly in recent years, clearly indicating that government departments are not the primary cause of deficits. Yet under Mr. Oliver’s legislation, it’s government departments that would be penalized.
His proposal refers to “published deficits”. Does that mean forecast deficits or final published deficits? If published deficits mean “final” published deficits, would this mean that governments could never publish a deficit forecast?
Deficit forecasts can go wrong for many reasons, such as overly-optimistic economic assumptions or a failure to properly estimate the cost of new policy initiatives, or changes in taxpayer behaviour. The minister of Finance and his department are ultimately responsible for the economic and fiscal forecasts. Yet the proposed legislation would penalize departments and agencies for these errors, even though they have no input into the budgetary process.
And Finance ministers know how to fool the balance sheet. Mr. Oliver recently sold off the federal government’s shares in General Motors in an attempt to achieve a balanced budget in 2015-16. Under generally-accepted accounting principles, net gains from the sales of shares only affect the deficit/surplus in the year they are realized — that is, in the year they were sold. Until then, any unrealized gains affect the federal debt only through an adjustment to “comprehensive income”. Remember, this government had already booked $1.5 billion in asset sales in order to record a balance budget in 2015-16.
There’s also a downside to being too cautious. Dr. Tim O’Neill, who examined the federal budgetary process in 2005, observed that having to meet a single-year point estimate — balanced budget or better — likely resulted in Finance being extra-cautious in its forecasts to ensure that the target would be met, undermining the credibility of its fiscal projections.
Mr. Oliver said that the government would have to present a plan to return to balance in the event of a deficit. But he hasn’t said whether the resulting increase in the federal debt would have to be repaid as part of that return to balance.
Finally, there’s the whole problem of making sure the fox isn’t in charge of the henhouse. For any balanced budget law to work at all, it would have to be monitored by an independent body — the Parliamentary Budget Office seems the obvious choice. For that to happen, the PBO’s mandate would have to expand to cover dating the economic cycle, estimating the cyclically-adjusted and structural balance, verifying the costs of ‘extraordinary’ circumstances and measuring the government’s compliance with the law.
Given the Harper government’s many conflicts with the PBO, does anyone think that’s a realistic plan?
Original Article
Source: ipolitics.ca/
Author: Scott Clark and Peter DeVries
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