‘Just spend more’ is not sound fiscal policy

As we pass the midway mark in the federal government’s mandate, it’s clear that the only guiding principle for fiscal policy is ‘just spend more.’

Spending more, regardless of economic conditions, is not sound policy. It seriously risks the country’s finances and is all too reminiscent of the 1960s and ’70s, which took Canada almost three decades to recover from.

There are generally two approaches to government finances.

The first is rooted in Keynesian economics, named after one of the most influential economists of the 20th century, John Maynard Keynes. The basic idea is to manage the demand side of the economy to smooth out economic fluctuations. In bad times, the government stimulates demand, particularly by consumers, by spending more, lowering tax rates and/or lowering interest rates, and thus (at least theoretically) improves the economy. Conversely, in good times the government reduces spending, increases tax rates, and/or increases interest rates to temper the economy so it doesn’t overheat.

The other approach, often called supply-side economics, argues that government lacks the information and incentives to manage the economy along Keynesian lines. This approach focuses on improving incentives in the economy for savings, investment, entrepreneurship, business development and work effort. The underlying idea is to get the rules of the game and incentives right so individuals, families, entrepreneurs and businesses make better, more productive decisions, which leads to a stronger economy.

The reality of politics is that neither approach is ever implemented or maintained in its pure form. Government policy tends to ebb and flow between these two sets of policies.

For instance, the Liberal government led by Jean Chretien tended more towards improving incentives and the rules of the game by balancing budgets, reducing tax rates and reforming government spending.

The Conservative government led by Stephen Harper had a more mixed record, favouring Keynesian-type policies during the 2009 recession and its immediate aftermath while promoting better rules of the game outside this period.

Neither of these approaches seems to be operative in the current federal government. Instead, there seems to be a drive to simply spend more money. If the economy is weak, Ottawa should spend money. If the economy is strong, Ottawa should spend money.

That’s not a guiding principle for fiscal policy – it’s a path to fiscal calamity.

The Liberals under Prime Minister Justin Trudeau took office in late 2015 and immediately boosted spending by roughly $7.7 billion from the budget plan of the previous government. Less than six months later, in its first full budget (2016), the government proposed to increase spending by $66.3 billion over the four-year period (2016-17 to 2019-20) compared to the 2015 budget. A year later, in its 2017 budget, the government proposed to increase spending by another $10.9 billion over this same four-year period.

Per-person spending (adjusted for inflation) is now at the second highest level in Canadian history, behind only Harper’s spending in 2009 in the depth of a global recession.

Perhaps more telling is the economic update released in October, which introduced more new spending of $17.5 billion between 2017-18 and 2022-23 despite the government’s pronouncement that the economy was improving.

Remember, these spending increases and ensuing deficits are occurring outside a recession. Any economic slowdown, or perhaps even a recession, will place the government’s finances into deeper deficits. That would likely take a decade or more to work out of, meaning the country will accumulate substantial additional debts, further burdening future generations.

As Canadians take stock of the Liberals’ two years in office, consider the lack of a functioning guiding fiscal principle – other than what appears to be a proclivity for evermore spending. And that just puts federal finances in serious peril.

Jason Clemens and Niels Veldhuis are Tro media columnists

Get local stories you won't find anywhere else right to your inbox.
Sign up here

Comments are closed

Just Posted

3 active COVID-19 cases remain in Red Deer

47 new cases Tuesday in Alberta, still 620 active cases

Severe thunderstorm watch in place for Red Deer

Environment Canada issued the watch Tuesday afternoon.

Red Deer RCMP seek public assistance after hit and run with pedestrian

A hit-and-run collision sent a pedestrian to hospital Monday evening in Red… Continue reading

COVID-19 milestones recounted in Red Deer museum display

Citizens have been adapting to the ‘new normal’ in innovative ways

Central Alberta artist depicts those lazy, hazy (virus-free) days of summer at Sylvan Lake

David More’s Shore Figures exhibit is showing at the Red Deer museum

QUIZ: A celebration of dogs

These are the dog days of summer. How much do you know about dogs?

Daisies bring a sunny look to the garden

Daisies bring a sunny look to the garden

IIHF encouraged by NHL’s potential return to Olympics in ‘22

IIHF encouraged by NHL’s potential return to Olympics in ‘22

Raptors coach Nick Nurse knows attention to family will be key for players

Raptors coach Nick Nurse knows attention to family will be key for players

NFL, NFLPA still haven’t resolved all protocol for camps

NFL, NFLPA still haven’t resolved all protocol for camps

More positive tests, cancelled workouts add to MLB unease

More positive tests, cancelled workouts add to MLB unease

MLS to resume season minus 1 team amid growing virus concern

MLS to resume season minus 1 team amid growing virus concern

US government launches campaign to reduce high suicide rates

US government launches campaign to reduce high suicide rates

In risky bid, Trump stokes racial rancour to motivate voters

In risky bid, Trump stokes racial rancour to motivate voters

Most Read