Business·Analysis

Deficits can mean pain ahead, or they can be an investment in the future: Don Pittis

To spend or not to spend? Since 2008, the global consensus seems to be in favour of greater government engagement in the economy, especially spending that will result in economic benefit down the road.

When does government spending become reckless? No one seems to know anymore

Yukon's Klondike Highway. In the 1950s the federal Conservative government of John Diefenbaker invested millions in his Roads to Resources plan opening the North to development. (Don Pittis/CBC)

Should Canadians be worried when elected officials, or politicians who want your vote, promise to spend money they don't have?

The fear that the credit crunch and recession of 2008 would turn into something much worse accorded governments new licence to put taxpayer-backed money to work in the economy.

And that new freedom to shell out has by no means been limited to "tax and spend" leftists.

Despite long time lip service to thrift, the U.S. has been a deficit-spending world leader, bailing out banks, buying up bonds to release more private sector cash into the economy, cutting taxes without commensurate cuts in public outlays, and harbouring off-balance-sheet future expenses such as pension liabilities.

With Republicans in charge, fiscal and monetary stimulus continued even as the North American economy roared and the deficit grew.

Now whether, or how much, governments should borrow from the future to spend immediately has become an issue in the Canadian election.

'Credit card campaign'

"We're choosing to invest in middle-class Canadians, invest in people's communities, because, quite frankly, that is what has worked over the past four years," said Liberal leader Justin Trudeau while announcing new spending promises that crowd the New Democrats on left.

According to the Liberal Party's own calculations, which, since no one knows the future, are inevitably only rough estimates, the new spending plan would push the deficit in the 2020-21 fiscal year above $27 billion.

Speaking for the Conservatives, Ontario MP Pierre Poilievre offered a scathing response.

"This is Justin Trudeau's credit card campaign," said Poilievre. "He expects Canadians to believe that money falls out of the sky or grows on trees."

Credit card campaign? Or is it more like investing in a house. The way a government spends public money makes a difference. (Don Pittis/CBC)

But Trudeau may not be alone. As Conservative leader Andrew Scheer bids for votes, the cost of his promises is also mounting.

All of which leads us to the question of whether government spending is ultimately good or bad for a country. And while there are political advocates for both sides, governments rarely avoid spending more than they earn in revenue.

"Government is not the solution to our problem, government is the problem," U.S. President Ronald Reagan famously said in his inaugural address. Ironically the economic boom during the Reagan era was funded by public borrowing, as tax cuts transferred public wealth to the private sector. During his two terms as president, the U.S. public debt tripled.

Diefenbaker and Queen Isabella

Historically, Canada's Conservative-led governments have seen a place for public spending. The Roads to Resources plan by the government of John Diefenbaker in the 1950s was promoted as a way to open up the isolated communities of the Canadian North to new development.

Mostly remembered as a success, the idea was that the federal government would spend hundreds of millions of dollars in road construction that no individual company wanting to exploit resources in the region could afford.

The idea of government spending to open up new territory is hardly new. It was the British government that funded voyages of discovery such as the Franklin expedition, though that didn't quite pay off. The Spanish government of Queen Isabella sponsored exploration by Christopher Columbus.

And that idea of government investment has expanded from new geography to new frontiers in technology. As economist Mariana Mazzucato, author of The Entrepreneurial State: Debunking Public vs. Private Sector Myths, has pointed out, it was massive government investment in unproven technology that created the even more massive private sector wealth of companies like Google and Amazon.

A statue in Madrid of Christopher Columbus, whose voyages were an investment by Spain's Queen Isabella. Modern governments invested in the technology that paved the way for companies like Google and Amazon. (Paul Hanna/Reuters)

Liberals may scoff at Poilievre's comparison of government spending to running up the credit card. After all, when governments spend money on something like northern roads or other infrastructure projects, the money flows straight back into the economy as wages and business profits that are taxed once again. But the comparison of personal debt and public debt is not baseless.

Running up a credit card bill for consumer goods is different from borrowing to invest in a home. In the same way boosting the deficit to offer juicy election handouts to voters is completely different from deficit spending for long-term investments in the economy. Promises from both frontrunners in this election fall on both sides of that equation.

Last month a group of economists, including French scholar Thomas Piketty, wrote a letter to the Financial Times declaring the advantages of European government investment in the economy, especially when interest rates are so low.

"Today the government can borrow at negative real interest rates: Many pressing infrastructure, education and environment projects offer returns well above zero and can therefore generate higher future tax receipts, supporting, not detracting, from fiscal sustainability," said the letter writers that also included Mazzucato.

The theory behind licence to spend

Mazzucato is one of those who have thrown her support behind that ultimate licence for governments to spend. In Modern Monetary Theory, the idea is that while inflation and interest rates remain low, governments should keep spending until every person is employed and inflation starts to rise. That theory is widely disputed.

Of course the public acceptance of government spending depends on the political times. When Ontario Premier Doug Ford warned of the province drowning in debt, he was playing on memories of older voters of when the federal debt-to-GDP ratio some claimed was as high as 72 per cent, though sources differ on that figure.

With considerable pain to the country, Liberal Finance Minister Paul Martin got the debt down, and since then governments have managed to hold deficit increases below the growth of the economy, something the Liberals are promising to continue. Of course a sudden plunge in economic growth could abruptly change the picture.

But in the wake of the Ford government's cuts in Ontario that many critics claim unnecessarily slashed investment in education, damaging the province's future prospects, the voters' attitude to deficit spending may be blowing the other way.

At least that's what Trudeau is betting for now.

Follow Don on Twitter @don_pittis

About the Author

Don Pittis

Business columnist

Don Pittis was a forest firefighter, and a ranger in Canada's High Arctic islands. After moving into journalism, he was principal business reporter for Radio Television Hong Kong before the handover to China. He has produced and reported for the CBC in Saskatchewan and Toronto and the BBC in London. He is currently senior producer at CBC's business unit.

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