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Good luck, EU, with that budget resolution

The Globe and Mail by Lisa Philipps and David Clarke 10 January 2012

Just in time for the holidays, European Council President Herman Van Rompuy announced a new “fiscal compact” among European Union members (aside from Britain, which so far has refused to play). The deal is meant to secure the value of the euro by imposing tough new budget limits in each country. We hate to spoil the party, but this is probably no more binding than a New Year’s resolution.

The compact commits each government to go home and table in its national parliament a constitutional amendment forbidding that government from running annual deficits greater than 3 per cent of GDP, or debt over 60 per cent of GDP. These limits are no more than what the EU already requires by treaty. But the hope is that entrenching them in law, especially constitutional law, will finally make them stick. The Canadian experience with budget rules suggests this hope is a false one.

The provinces have served as a fascinating laboratory for balanced-budget legislation since the early 1990s. Most have now retreated from the strict zero-deficit mandates they adopted when their economies were healthier. With the onset of the Great Recession in 2008, governments recognized there was strong public support for deficit spending to stimulate the economy and shore up essential safety nets. Provided they redeem these cyclical deficits with equivalent or better surpluses once growth returns, governments are on safe economic and political ground to borrow during downturns. This is why Manitoba, Alberta and British Columbia have all repealed or suspended anti-deficit rules they adopted in better times.

Ontario moved earlier to repeal its law, but for a different reason. One problem with legislating balanced budgets is the incentive it creates for governments to fudge the books with over-optimistic revenue forecasts or creative accounting methods. Conservative governments led by premiers Mike Harris and Ernie Eves gave in to this temptation. In 2004, after inheriting a long-denied multibillion-dollar deficit, the newly elected Liberal government replaced Ontario’s balanced-budget law with a more flexible version designed to strengthen fiscal transparency. This approach has gained favour with both right- and left-leaning governments in countries such as Australia, New Zealand and Britain.

Will constitutionalizing the EU budget rules make them any more effective? The drafters of the EU’s fiscal compact are gambling that countries will be less inclined to ignore deficit and debt caps if they are entrenched within the supreme laws of their own countries. Unfortunately, there are some holes in this theory.

Constitutional amendments generally require some form of super-majority approval. What if a government never proposes the amendment, or fails to get the necessary level of parliamentary support? The fiscal compact says the European Court of Justice could order the errant government to comply. Yet, the court cannot force the elected legislators of a country to vote in favour of a constitutional change that they, or their constituents, do not support. Even those countries that do adopt a constitutional budget rule could later decide to ignore or change it, as circumstances dictate. In principle, a government can be sued in national courts for violating its own constitution. Yet, it’s not clear who would bring suit, whether judges would see fit to override fiscal policy decisions or how a judicial order to balance the budget could be enforced.

Ultimately, budgets are political documents, and governments respond to popular will. The fiscal compact may have some value in mustering that collective will to make better fiscal choices. But calling it “law” does not make it so.

Lisa Philipps is associate vice-president, research, at York University and a professor at Osgoode Hall Law School. David Clarke is a student at Osgoode Hall Law School.