Canada's fiscal advantage

The London Free Press
By Rory Leishman

According to the latest governmental estimates, Canada is heading toward a record federal budget deficit of close to $56.9 billion. That's disturbing, yet Finance Minister Jim Flaherty has good reason to insist: "This country looks so great compared to most of the other western industrialized countries."

Consider, for example, the United States. President Barrack Obama is projecting a gargantuan budget deficit of $1.56 trillion deficit in 2010. That amounts to 10.6 per cent of the country's entire economic production, far higher than the corresponding Canadian ratio of just 3.8 per cent.

Flaherty projects that as the economy recovers and government revenues increase, the government of Canada will be able to eliminate the federal budget deficit over the next five years without having to resort to tax increases or any major spending cuts. While some experts consider that view unduly optimistic, no one thinks that Canada is in serious fiscal trouble.

The same cannot be said for the United States. The Economist magazine has warned: "Mr. Obama’s budget reveals a road-map to fiscal catastrophe." Correspondingly, in a news analysis headlined "Deficits May Alter U.S. Politics and Global Power," the New York Times reported: "By President Obama's own optimistic projections, American deficits will not return to what are widely considered sustainable levels over the next 10 years... His budget draws a picture of a nation that like many American homeowners simply cannot get above water."

Britain is in even worse shape as the Labour government of Prime Minister Gordon Brown is running up a government deficit of no less than 14.2 per cent of GDP. Meanwhile, after years of reckless deficit spending, the socialist government of Greece is hovering on the brink of outright bankruptcy.

What accounts for Canada's relatively good fortune? The Liberals deserve much of the credit. In 1998, former Liberal finance minster Paul Martin ended 27 consecutive years of deficit spending, by means of a series of major tax hikes and spending cuts. In doing so, he set the basis for 10 straight years of budget surpluses that lifted Canada out of the kind of serious debt crisis now confronting the United States and Britain.

However, it was those same Liberals that got Canada into fiscal trouble in the first place. When Pierre Trudeau took over as prime minister in 1968, he inherited a budget surplus. But when he left office in 1984, his government ran up a record peacetime budget deficit of close to nine per cent of GDP.

The Mulroney Conservatives made only a half-hearted attempt to rein in deficit spending. Even so, the opposition Liberals made matters worse, by strenuously objecting to any major spending cuts that the Conservative government might propose.

Martin was more fortunate. In his struggle to eliminate the deficit, he got considerable support from Reform Party leader Preston Manning, who kept urging the Liberals to slash spending.

The current Liberal leader Michael Ignatieff has been less consistent. Just a few months ago, he was admonishing the Harper Conservatives to increase deficit spending even further as a means of stimulating the recession-bound economy. Yet now, he decries the size of this year's federal budget deficit.

Last week, Ignatieff announced that a Liberal government would introduce a national child-care system. "We will find the money, because it seems to me an excellent investment," he promised. "I am not going to allow the deficit discussion to shut down discussion in this country about social justice."

We have heard that line before from Trudeau as well as big spenders in the United States, Britain and Greece. In all cases, such folly has led to a debt crisis that compels major cutbacks, not increases, in government spending on social programs.

It will be interesting to see how Ignatieff reacts to the new federal budget due next month. Should he decide to bring down the Harper government on the ground that it is not proposing to spend enough on new social programs, he could lead the Liberals to a calamitous setback in the ensuing federal election.