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Five reasons to stop obsessing about balanced budget

Globe and Mail by Lisa Philipps 9 April 2015

Lisa Philipps is a professor at York University’s Osgoode Hall Law School.

As the 2015 government budget season rolls out across the country, what should Canadians really be watching for? So far the bottom line is hogging too much of the attention.

The hype about balanced budgets is understandable given the enormous political capital at stake. Finance Minister Joe Oliver made this perfectly clear on Wednesday when he confirmed the government will introduce legislation. What’s less clear is why we care so much about the bottom line above all else. Achieving a surplus has moved beyond a sensible policy goal to a kind of fetish. Here are five reasons why we should worry less about the bottom line in any particular year, and more about the tax and spending decisions made to get there.

1. It’s only a projection. A budget is a plan for the next 12 months, based on predictions about employment levels, interest rates, corporate profits, and other notoriously unpredictable numbers such as commodity prices. A modest surplus or deficit in the budget can easily reverse itself over the course of a year.

2. Cyclical balance is a responsible goal; annual balance not so much. The 2008 global financial crisis reminded us of the need for governments to offset downturns in the private economy. Almost overnight, an allergy to deficits was replaced with urgent calls for stimulus spending to boost employment and demand, to stop the downward spiral. The Conservative minority government of the day at first resisted, then relented after almost losing power to a coalition of opposition parties. Its deficit spending was later endorsed by voters who gave the government a majority in 2011. Five years on, we seem to have forgotten this lesson – that it’s right and good for governments to step up when times are tough.

3. Policy makers must be nimble in today’s global economy. No matter how well we manage our affairs, Canada is not an island. Continual adjustment to external shocks is an accepted fact of monetary policy, with the Bank of Canada executing mid-course changes as needed. Yet we deny fiscal policy makers the same leeway. Equating a deficit with political failure, regardless of changing circumstances, acts as a deterrent for elected leaders to react quickly to emerging crises.

4. Honesty and transparency suffer. If balancing an annual budget is a precondition to be re-elected, we can be sure the government in power will make it look balanced. The IMF has criticized rigid fiscal responsibility laws for just this reason – they create incentives to game the books, rather than addressing budget challenges forthrightly.

5. It distracts from more important stuff. Whether a budget is in the black or red matters less than how it got that way. Is the government making wise revenue and spending choices for today and for the longer term? Or are decisions driven by short term thinking, designed mainly to create the appearance of budget balance? And if taxes or expenditures are being adjusted, have the costs and benefits been spread around in the fairest and most productive way possible?

Expect to hear more on this topic over the coming months as Ottawa unveils the details of its proposed law. Several provinces as well as other countries have tried balanced budget laws. Studies have found reason to doubt their value, citing the five concerns above, among others. Much depends on crafting a law that is flexible enough to handle both moderate downturns and more severe recessions, promotes transparency, and allows for borrowing to fund longer term investments, over and above an obsession with the annual bottom line. Handcuffing fiscal policy makers of the future with simplistic legislation would do more harm than good.