Deficit saving

(StatsCan, 2008)

In the past federal election, all parties including the NDP and Greens promised to run a balanced budget no matter what. 3 months later, the Conservatives' budget does indeed have a deficit, and they are roundly criticized for it.

We know from "governing" our own affairs that running a long-term deficit is bad because sooner or later debt payments grow out of control and force us to make painful spending cuts. It is OK to keep a certain level of debt--in fact, nearly everyone does--but too much is a recipe for disaster. The same logic should be applied to governments... or should it?

1. Just like businesses, governments take on debt to pay for profitable projects. Such a deficit is worthwhile if the profits from the project are larger than the interest payments. In some cases, the deficits and profits are within the same organization, such as the now-privatized Ontario Hydro; in other cases, a different department or the citizenry itself benefits, such as treatment of raw sewage to prevent an expensive epidemic of waterborne disease. Water treatment plants will always run a deficit, but it is silly to say that we shouldn't treat our water because of that. Many academic, social, and cultural projects have no financial benefit whatsoever but are still worthwhile.

2. When interest rates are lower than inflation, as they were for decades, the real value of the debt shrinks by itself. In other words, government revenues rise naturally with time as the money supply increases, and as long as the deficit is smaller than that rise, there is no problem. So if a government really wants to reduce its debt, it should have a low-interest macroeconomic policy. Perversely, since the mid-80's our government has had both balanced-budget and high-interest-rate policies. Interest payments went way up, and the debt still grew despite painful cuts to social programs.

3. The government is also concerned with encouraging investment. That way, unproductive capital can be put to good use. Government bonds are an excellent investment: in return for regular (and 100% guaranteed) interest payments, the rich lend their cash to fund public programs. Without government debt, there would be no government bonds, and investors would turn to speculative "investment" like that which lately shattered the global economy. Government could also tax the rich directly to finance its public programs, but acquiring debt is considered less intrusive. From that point of view, the only problem with a large debt is that tax dollars from the working class are being continuously given to the rich with nothing in return.

4. The government is also concerned with the well-being of its citizens and with the productivity of the overall economy. There are social and financial benefits when citizens have good jobs, and sometimes it's worth it for the government to step in and provide such jobs in sectors or regions too unprofitable for private corporations.

5. Another pertinent question is to whom the interest payments are paid. In most of the 20th century, government departments borrowed from the Bank of Canada, which meant that there was no net cost to the public. When they borrow from private banks, they are paying for the privilege of creating their own currency.


With that said, it should be clear that running a government deficit is not automatically a bad thing.