Friday, September 30, 2005

Balancing Act

The Liberals love balancing the budget so much that they're going to make it the law .

A spokesman for Finance Minister Ralph Goodale refused to comment, but it is understood the government will introduce legislation that guarantees the maintenance of an annual contingency fund.

The so-called "no deficit rule" has been in effect since the budget was balanced in 1997-98, but it remains a convention rather than a legislated requirement. The legislation, which may come as part of Mr. Goodale's fall fiscal update, will also likely commit the government to reducing the debt/GDP ratio to 25% by 2014, from the current 39%.

The dramatic rise in government spending in the last fiscal year has led to accusations by Conservatives that the budget surplus is being squandered and that the economy could slide back into deficit if growth slows.

Sounds like a good idea in practice, no? But even the major banks think it's a bad one:

However, Don Drummond, chief economist at TD Bank Financial Group, said a guarantee against deficits was "horrifically bad policy. This is entirely political. We have created an 11th principle 'thou shalt never go into deficit' but the impact of a $1- or $2-billion deficit in an economy our size would be irrelevant. The whole thing seems bizarre."

Many economists believe a commitment never to run a deficit might lead governments to raise taxes or reduce spending during a slowdown, and thereby exacerbate the economic downturn.

Tim O'Neill, the chief economist at Bank of Montreal who was asked to review Canadian fiscal forecasting this year by Mr. Goodale, concluded the no-deficit rule was a major cause of the persistent inaccuracies in budget forecasting that have seen the government continually under-estimate large surpluses.

Mr. O'Neill recommended the government instead balance its budget over an economic cycle, which would allow deficits to be incurred when warranted by economic circumstances.

Can you see the NDP agreeing to this in the Liberals' next budget, when even the major bank economists can see the need to run the odd deficit budget in an emergency? The only reason it's there is to embarrass the Tories for voting against one of their own platform planks.

What assurance do we have that the contingency fund will not be treated as just another stream of general revenues?

The idea of a federal heritage fund, like Alberta's, sounds attractive in theory, but in practice, it's likely to become another federal slush fund.

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