The Balanced Budget Fetish

by
David Gracey
(Scarborough Southwest NDP)

The federal NDP Election Planning Committee appears committed to a policy of annual balanced budgets as a key plank in our election platform. The rationale is that about 90% of the party members who attended the strategy/planning seminars supported such an inclusion. Similarly, a large majority of the members of recent focus groups, consisting of people who “liked” the NDP but had not voted for us, also supported its inclusion.

At first glance, these numbers are shocking. How is it possible that so many of our members and its supporters have forgotten our party’s origins and the basic tenets of Keynesian economics? These numbers are eloquent testimony to the power of the right wing press, business spokespeople, “think” tanks like the Fraser Institute and the C.D. Howe Institute, and countless Liberal, Tory and Alliance politicians – all reciting the mantra of balanced budgets. In the 90s we were subjected to an unprecedented scare campaign about debt and deficits which, though mostly false, clearly had a great impact on the population. Here in Ontario, we have endured eight years of Tory obeisance to the balanced budget (more in rhetoric than reality, it now appears) and the victorious Liberals found it necessary to worship at the same altar (at least until they got elected!).

No doubt a balanced budget is desirable most of the time, but that does not mean a fiscal deficit is a bad thing. After a decade of tax cutting, budget balancing governments in Toronto and Ottawa, we face serious real deficits – in our municipal infrastructure, in public housing, in health care and education. These deficits are seriously injurious to the public welfare, much more so than a financial deficit. As the new Liberal government in Ontario has discovered, a deficit is not the greatest evil of our times.

Why is the right so enamoured of balanced budgets? Well actually they are not! If you look closely, their allegiance is mostly rhetorical. George W. Bush is running a deficit this year of $521 billion – compared to a surplus of $250 billion in Clinton’s last year. The Reagan administration ran huge deficits. Here in Canada, the Trudeau Liberals and the Mulroney Tories had massive deficits year after year. In Saskatchewan, the profligate Tories under Grant Devine ran the biggest per capita deficits in history, pushing the province to the brink of bankruptcy.

The right wing rhetoric about balancing the budget is really about reducing social spending. They love tax cuts (which reduce revenue) and certain types of expenditure, like the military and subsidies to corporations, but they hate social spending of any kind. The balanced budget cudgel is their weapon of choice. If you cut taxes and balance the budget, you cannot possibly increase, or even maintain, social programs. If the pressure is sufficient, you may have to sell off government assets to balance the books – the method of choice for our late lamented Tories in Ontario.

Balanced budgets are a key component of the “Washington Consensus” and are invariably imposed by the IMF on countries being subjected to “structural adjustment.” The result is always a shrinkage of the economy, a goal sought by the IMF but inimical to the welfare of the population. It is but one of many IMF tools designed to impoverish the population and improve the climate for bankers, investors and multinational corporations. (See Joseph Stiglitz’s Globalization and Its Discontents.)

There is a more fundamental issue. In any economic downturn a government deficit is an absolute necessity. The Ontario Rae government was correct in running large deficits during the terrible recession of the early nineties. Unfortunately they were unable to withstand the attacks of their opponents, who cared little about the deficit but wanted to force the government to reduce social spending. By failing to defend their stimulative fiscal policy, they paved the way for the destructive tax and spending cuts of the Harris Tories.

Have we forgotten the important lesson of the Great Depression? In the early 1930s, almost all governments responded to the downturn in the economy by reducing expenditures in an effort to balance the books. Of course this reduced aggregate demand even more and made matters worse. At this juncture, J.M. Keynes, in his masterful and seminal work, A General Theory of Employment Interest and Money, demonstrated that the problem was a lack of demand (i.e., spending), and that the only solution was for the government to borrow massively, spend massively and run massive deficits. Roosevelt’s New Deal in the US was a partial implementation of this policy. Countries like Sweden and New Zealand went further and ended the Depression in their countries within a few years. When WWII broke out, Canada (like Britain and the US) printed money, borrowed massively, and spent huge sums on the war. Within 18 months we had full employment. The deficits were huge: by 1946 the national debt was 127% of GNP, but the economic stimulus carried the economy through the post-war expansion. Very little of the debt was actually paid off but economic growth reduced the relative size of the debt to 25% of GNP by 1960. Keynes had been proven right and the lesson is still valid today, if largely forgotten. Do we really intend to sacrifice countless workers on the altar of balanced budgets as R.B. Bennett did in the thirties?

More fundamentally, this simplistic nonsense distracts us from a much more important discussion – monetary policy. Many people who worry about deficits are really worried about debt, and with good reason. In our society debt is escalating at a fearsome rate. Today, household debt averages $66,900 – an increase of 18% in four years. As public (government) debt has been reined in over the past decade, private debt (businesses and individuals) has ascended into the stratosphere and it is far more damaging than public debt. Why, for example, do politicians congratulate themselves on taming deficits when thousands of university graduates have been forced to incur debts well in excess of $25,000 because those same politicians reduced grants for higher education? Are we really better off? In reality, the balanced budget/tax cutting mantra has been used to manipulate us, and now it looks like we are going for the bait – hook, line and sinker!

We need to look at the real problem and educate our public about real solutions. Debt is the problem, monetary policy is the solution. Since 1980, we have deregulated the financial system and privatized money creation. In 1991, bank reserves were abolished. Less than 5% of our money supply is legal tender (i.e., created by the government through the Bank of Canada). The other 95% has to be created by borrowing, i.e., by incurring debt. An increasing money supply – about $25 to $30 billion per year – is absolutely essential to maintain economic growth. Thus we are caught. We must increase our debt to maintain economic growth and pay the interest on previous debt. The only way government debt and deficits can be stabilized is for individuals and businesses to borrow more. If we reduce our borrowing, the economy must contract.

Of course, it does not have to be that way. We could re-regulate the financial system. The government could create a greater share of the money supply – say, the 20% it used to create. The Bank of Canada could assume a greater share of the national debt. And the Bank of Canada could make low interest loans to municipalities for infrastructure. By the way, most of these proposals have been adopted as policy at NDP conventions but actually implementing them would entail a tough fight with the banks and other vested interests.

No doubt such a fight would be difficult to win. It is probably a lot easier to tell the public that we have learned our lesson and will behave ourselves in future. It might even win over a few converts – though how we can outdo Paul Martin and the new Conservatives in this area is a mystery to me. The worse outcome, of course, would be to come into power burdened by such an inane policy. Surely we can do better.