Running a deficit could have opposite effect, report says

[REUTERS/Mark Blinch]

The federal government’s plan to run a higher-than-promised deficit is the wrong way to stimulate the Canadian economy, says a news report by the Montreal Economic Institute (MEI) released Thursday.

And according to the think-tank’s economist Mathieu Bédard, if the government continues to spend at its current rate, it could actually have the opposite effect.

“It will take resources away from private enterprises,” he told Yahoo Canada News. “It might create jobs in the public sector but it will not create any durable jobs in the private economy. It will not have any positive effect in unemployment in the long run.”

The Liberal Party campaigned on a promise to run a deficit of no more than $10 billion a year for two years. But most recent updates put the deficit at $18.4 billion for 2016-17. That’s excluding the several billion dollars the federal government promised to invest in infrastructure.

And that spending could mean taxpayers will have to dig even deeper into their pockets — sooner or later.

“Eventually an increase in public spending has to be paid for,” Bédard said. “This public spending might end up costing a lot to the taxpayer.”

Each tax dollar collected costs society between $1.10 and $5, according to estimates by Harvard University and the universities of London and Chicago, Bédard says.

After the 2008 financial crisis, Bédard said that countries that chose to increase both their spending and their tax burdens experienced very slow growth, while countries that reduced both their public spending and revenues achieved a faster average annual growth rate.

Running a deficit, Bédard says, is a very “Keynesian” way of thinking — a theory that says boosting the economy through public spending during periods of recession works — and it’s one that Bay Street economists have embraced.

The problem, however, is that Canada is not in a recession — nor was it in 2015 — Bédard argues.

“We won’t even be in a recession this year,” he said. “The projections from the Bank of Canada confirmed that yesterday. So there’s no stimulus effect to be had by increasing the deficit.”

Instead, Bédard believes the best way to stimulate growth should be by removing obstacles for entrepreneurs and innovators by reducing taxes and regulatory red tape.

But according to CIBC deputy chief economist Benjamin Tal, Canada’s economy is in a post-recession transition period that requires some major adjustment to its model in order to succeed.

“The dollar needs a little bit more help here,” he said. “That’s where fiscal policy comes into play. So I say spending now will be the right thing to do.”

But government spending shouldn’t be a free-for-all, he said. The money should instead be spent strategically, like on infrastructure.

“There’s a need to re-balance the economy and the only tools that are available now that is going to work is fiscal policy,” Tal said. “That doesn’t mean spend on something that isn’t necessary. Infrastructure is key. We have been under-investing in infrastructure for decades now and we have a huge infrastructure deficit of roughly $120 billion.”

Tal added, “I agree that if this money is going to be spent without thinking then it’s a waste of money. But if it’s going to enhance the ability of the economy to grow in the future, vis- à-vis smart infrastructure spending, then I think that’s the way to go and the time is now.”

But in the end it all comes down to perspective, said Tal.

“We’ve been able to run huge budget deficits for a long period of time to get to where we were in the 1990s,” he said. “Relative to many other countries we are the envy of them after we run deficits because their target is to get to our debt-to-GDP ratio after we spend the money.”