The Canadian Taxpayers Federation said having them was "a threat" to Canada's prosperity.

The Economist magazine said running them was analogous to being "in the red."

Nobel-prize-winning economist Paul Krugman opined that producing them was "the right thing to do."

Love them or hate them, government deficits — once relegated to the bin of solved economic problems — have exploded back onto the public policy agenda.

In fiscal 2009-10, Ottawa expects to post a budgetary shortfall in excess of $55 billion, almost ten times the deficit in 2008-09.

In the United States, the Obama administration will run a record deficit of $1.6 trillion US this year.

The Organization of Economic Co-operation and Development, the Paris-based economic think-tank, now predicts that its 30 member countries will post a cumulative shortfall of almost $3 trillion US in 2010.

That prediction is a six-fold increase compared to the deficit of $478 billion US these same countries ran in 2007.

In the past 18 months, most nations basically threw fiscal caution to the wind in a bid to combat rising unemployment and sinking economic activity resulting from the 2008 global credit crunch.

"Many OECD governments are facing a significant increase in expected deficits this year due to the fiscal fallout of a recession that is worse than first anticipated and the financial consequence of resolving banking crises," said the OECD in a December analysis of its members' public finances.

And that means past arguments about the usefulness of government deficits have returned.

Calculating the figures

Put simply, a government's budget balance represents how much the state spends compared to how much revenue it takes in.

If Ottawa forks out more in terms of health payments, transfers to provinces and other spending than it takes in taxes, asset sales and other revenue, Canada will post a deficit.

In fiscal 2007-08, the federal government spent almost $233 billion on various programs and interest payments on existing debt.

For the same April-to-April period, Ottawa took in $242.4 billion in revenue from various sources.

Finance Minister Jim Flaherty, heading into a February cabinet meeting, must grapple with a deficit in his upcoming budget. (Fred Chartrand/Canadian Press)

All told, the government posted a surplus of $9.6 billion that fiscal year.

By contrast, in 1983-84, the government spent nearly $76 billion on programs plus another $20 billion servicing the public debt but took in only $64 billion in revenue. The result was a federal deficit of $32 billion.

The math is fairly simple, just adding and subtracting.

What is important to remember, however, is that the government spends money not just on programs such as health care but also on interest payments on the country's existing debt, which is distinct from its budget deficit.

In this case, Canada's net debt — $525 billion in fiscal 2008-09 — represents the country's accumulated deficits since Confederation in 1867.

To service that mountain of borrowing, the federal government pays interest, which in 2008-09 totalled $31 billion.

Because Canada's deficit and its debt are different fiscal measures, the country can post surpluses and still be borrowing money.

Between 1997-98 and 2007-08, Canada ran surpluses, which allowed the government to reduce the country's debt.

In 1996, Canada's borrowing reached $562.9 billion but then fell by almost $100 billion over the next 11 years.

Re-starting an old debate

Few people dispute the deficit numbers; many struggle with what they mean.

To fiscal conservatives, almost any deficit represents a lack of backbone, the inability to make tough decisions concerning what spending to cut. In that line of thinking, the solution to the federal deficit lies not in economics but moral fortitude.

"All it will take for the government to balance the budget over three years is a little political leadership," said Kevin Gaudet, federal director of the Canadian Taxpayers Federation, a fiscally conservative research group based in Regina.

Conversely, more liberal thinkers view a deficit as the result of a stumbling economy in which government revenues fall while public spending rises. In that case, the budgetary shortfall becomes a fiscal tool with which to fight higher unemployment or increase spending in some socially worthy area.

In this case, the deficit is a means to an end — more jobs or improved prospects for some disadvantaged group.

"Reducing the deficit is less important than reducing unemployment," said Erin Weir, an economist with the Canadian branch of the United Steelworkers' union, before a committee of the Ontario legislature in December 2009.

What type of deficit is it?

Front and centre in these deficit debates is the question of what type of shortfall Ottawa has.

Essentially, economists like to divide a budget deficit into its structural and cyclical components.

At first glance, parsing the budgetary shortfall in this manner might appear to be a pretty ephemeral exercise.

In fact, many economists view the split between these two parts of the deficit as crucial to the question of what the government should do to reduce the red ink.

Here, public policy types debate how much of the deficit is caused by a slumping domestic economy and how much by entrenched government spending.

Cyclical

As Canada's economy slows, like it did during all of 2009, tax revenues fall.

In 2008, Ottawa raked in $117.1 billion in personal income taxes. The government now expects individual taxes to slump to $110 billion in the 2009-10 fiscal year, a drop of about $7 billion.

Similarly, corporate income taxes reached $40 billion in 2007-08 but are predicted to fall to $26 billion in '09-10.

Besides flagging tax revenue, Ottawa also faces higher spending in periods of economic recession. So-called automatic stabilizer payments, such as unemployment insurance, rise during downturns, boosting the country's public spending.

Higher spending combined with lower revenue often turns a budgetary surplus into a deficit.

That is the bad news.

The good news is that, as the economy starts to grow again, the trend of higher government spending and reduced revenue reverses, shrinking the deficit almost naturally.

"Thus, a 'cyclical' deficit is not a worry. A 'cyclical' deficit … is a boost to GDP," said Brad DeLong, a professor of economics at the University of California Berkley and an adviser to U.S. president Barack Obama, in a 1996 lecture on federal budgets.

Structural

Economists, however, exhibit much greater concern regarding a structural deficit.

This kind of deficit arises when the government's built-in spending cannot be supported by the underlying tax architecture.

Parliamentary Budget Officer Kevin Page has been critical of Canada's rising structural deficit. (Fred Chartrand/Canadian Press)

For a structural deficit to arise, Ottawa must have a large portion of its total spending in payments such as transfers to the provinces, health-care expenditures and the like, that is, payments that do not generally rise and fall with the state of the economy.

In addition, the government's taxation structure must be such that it cannot generate sufficient revenue during good economic times to eliminate the overall deficit.

"In ordinary language, a 'structural' deficit is one that is hard to get rid of," wrote academics Stephen Gordon and Nick Rowe in a January posting on their well-regarded economics blog Worthwhile Canadian Initiative.

In Canada's case, the Conservative government's previous policy of cutting the goods and services tax from seven per cent to five per cent hurt the government's ability to support existing programs, according to many economy watchers.

The Parliamentary Budget Office (PBO), a government-funded fiscal watchdog, believes Ottawa's entrenched deficit will worsen even as Canada's economic growth picks up.

In fact, the PBO now forecasts that the government's structural shortfall will grow to $18.9 billion by 2013-14 and reach one per cent of Canada's gross domestic product.

"The decline in the government's structural balance relative to potential income over this period is largely due to lower revenues," wrote PBO analysts Russell Barnett and Chris Matier in a January estimate of the government's structural deficit.

Why it matters

The increasing structural deficit presents Ottawa with a problem: a growing economy cannot eliminate the deficit.

Instead, the federal government needs to grapple with spending cuts in exactly those areas where Canadians, conservative or not, do not want to see cuts — namely, health care and provincial transfers that often pay for infrastructure enhancements.

Stephen Harper's government still does not hold a majority of seats in Parliament, often considered to be a pre-requisite for deep spending reductions.

Alternatively, Ottawa could re-examine past tax cuts. But the Conservative government has promoted its tax cuts as important for a national economic turnaround, making any increases in this area also unlikely.

The Obama administration has an even worse problem when it comes to resolving the structural deficit, mainly because the U.S. has a larger deficit than Canada and a slowing economy.

The U.S. government, however, faces the same dilemma as does Canada: slash spending on important programs or hike taxes.

Experts say the one thing neither government can do is ignore the problem.

"Unless offsetting actions were taken to reverse the accumulation of additional government debt, future incomes would tend to be lower than they otherwise would have been," said Doug Elmendorf, director of the U.S. Congressional Budget Office, a government-funded office that examines budgetary and economic issues.