Anyone for Deficits? A Short History of the D-Word in Canada's Development

By Lewis, Timothy | Literary Review of Canada, March 2009 | Go to article overview

Anyone for Deficits? A Short History of the D-Word in Canada's Development


Lewis, Timothy, Literary Review of Canada


IN THE LATE FALL OF 2008, THE HARPER GOVERNMENT was nearly replaced by a Liberal-NDP coalition with Bloc Quebecois support. This coalition, essentially without precedent in our national politics, was noteworthy in itself. But equally remarkable was that the coalition organized itself according to the position that the federal government should incur a stimulative fiscal deficit to address a rapidly declining economy. Coalition leaders argued that Jim Flaherty's economic and fiscal statement did not respond to Canada's economic reality and that the government did not deserve the confidence of Parliament. The government was saved by the governor general's decision to grant the prime minister a prorogation of the House of Commons, and when Parliament reconvened, Flaherty introduced what he referred to as a stimulative budget that projected deficits worth a total of $64 billion over the next two years.

This was a startling turnaround. After years of running from deficits, federal political parties started running to them. The Liberal government had eliminated fiscal deficits in the late 1990s, and Canada's record of fiscal surpluses over the next decade was singular among the G7 countries. This fiscal record was accompanied by adherence to the principle of balanced budgets, on which Canadian politics and policy was based. As recently as October, Harper had stated emphatically that "we're not going into deficit" and "we have every reason to believe Canada will stay out of recession if Canada doesn't start raising taxes and spending itself into deficit." Yet by early December the balanced budget principle had already eroded significantly.

While the degree of change was perhaps not as pronounced in most other countries, fiscal deficits became the order of the day elsewhere as well. In the United States, President Barack Obama committed to a two-year package worth at least US$775 billion to stimulate economic recovery even before his inauguration and in the House of Representatives the Democrats posted a two-year US$819 billion stimulus bill, on top of the estimated US$1.2 trillion 2009 deficit bequeathed by George W. Bush. European Union member states agreed to a stimulative response to the economic crisis. Clearly, something was afoot. How can we understand the sudden return of deficit finance?

[ILLUSTRATION OMITTED]

A QUICK HISTORY OF DEFICIT FINANCE IN CANADA

Balanced budgets have been a Canadian norm. As the Canadian economist Scott Gordon expressed in 1966, before the Keynesian revolution the grave consequences of going into the red "could be felt in the Anglo-Saxon bone marrow." Despite this attitude, fiscal deficits hold a distinguished place in Canadian history and have been called upon as a way to achieve the goals of an activist state. Deficit finance has been used for three purposes: to build a new country, to fight world wars and to stabilize the economy.

Deficits and debt built Canada. The objective of building a national economy swept aside doubts about the wisdom of borrowing because the transportation infrastructure (originally canals, then railways) needed to exploit Canada's natural resources was expensive and could not be privately funded. From before Baldwin and Lafontaine's responsible government in 1848 to Confederation in 1867 to Sir John A. Macdonald's National Policy in 1879 and beyond, Canadian governments ran nation-building deficits. By 1866, in fact, debt interest payments amounted to 29 percent of colonial spending, with more borrowing needed to finish the job. Confederation was in no small measure about deficit finance and the need to create a more creditworthy borrower--Canada.

During both world wars, the federal government used borrowing as a key method for financing Canada's participation. In part as a reaction to the World War One approach of borrowing now and paying later, World War Two was funded on a so-called pay-as-you-go basis. …

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