Fiscal conservatism versus the facts.

Feb.28 2008 1:54 pm


My dwindling circulation local English language newspaper has devoted a full editorial and an op ed piece taken from yesterday's Canadian budget to make its case against running a balanced budget as opposed to a surplus one as hard times approach.

This pathetic fiscal conservatism is entirely predictable but also sad because of the harm that its illogical thinking can promote. During the great depression of the 1930s there were legions of fiscal conservatives singing the praises of surplus budgets in hard times insisting quite wrongly that this sort of fiscal prudence would bring an end to the depression. In fact it prolonged the suffering and helped bring the Nazis to power in Germany in 1933.

The Montreal Gazette insists that spending Canada's current 13.5 billion dollar surplus on debt reduction is very wise policy.They could not be more wrong.

First let us note that the combined surplus of the provincial , territorial and federal governments in Canada as of this year is 30.3 billion dollars, or about 2% of the GDP.

There are currently a number of problems with our health care system,our infrastructure including bridges which need repair and   overpasses which have or could collapse, inadequate water treatment and supply systems, inadequate public transportation, understaffed schools, hospitals and nursing homes, inadequate access to higher education for our poor and even middle class children,   as well as a neglected social housing program.

In addition we are at war in Afghanistan. Several thousand of our troops are at risk of death and serious injury in the battlefield sometimes equipped with inadequate equipment including less than sufficiently safe troop transport.

Our current net debt to GDP ratio is just over 20 % of the GDP,   the ninth lowest ratio since 1926. Our net debt to GDP ratio is by far the lowest in the G7. This net debt ratio is the statistic that is used by the OECD when it compares countries' indebtedness. The historic all time low   for over 80 years of data from 1926 onwards is 16.8 % in 1973/4. During the second world war the ratio climbed to over 100 % peaking in 1946/47 at 106.6 % of the GDP. This more than five times higher than the current rate.

Our largest trading partner now faces a major economic downturn that has affected and will affect our exports. Every trained economist including monetarist ones understands that surplus budgets have a contractionary impact on economic growth.

Spending the 13.5 billion dollar surplus on debt reduction is very foolish in the current circumstances. The ratio of debt to GDP would continue to shrink if one balanced the budget and spent the surplus wisely on the list of areas I have outlined. As the GDP continued to grow the ratio would continue to drop because the numerator, the debt, would remain the same but the denominator , the GDP, would be growing.

For example, let us presume that because of the slowdown growth in the nominal GDP would fall to 2.0 % from the currently projected 3.5 %. Hence it would grow to 1.567 trillion dollars from its current 1.537 trillion. The gross debt would remain at 467 billion and the ratio would fall to 29.8 % instead of 29.2 % despite balancing the budget and spending all the projected 13.5 billion dollar surplus on infrastructure, health care, education and defense.

(Note we are assuming   probably wrongly that spending the surplus on investments rather than on debt reduction will have no positive impact on the growth of the GDP. In real fact it would and the gap between the two percentages would be even smaller.)


This approach would be a wise and fiscally intelligent policy that deserved the support of a major enlightened newspaper. Sadly no such paper exists for the moment in this country.