Crawl Across the Ocean

Monday, January 16, 2006

Good Bye Budget Surplus, We Hardly Knew Ya

I think the most worrying thing I have read so far in this election was this post by Andrew Coyne. Coyne, downplaying concerns about the affordability of the Conservative platform, says,
"What the Tories can't say, but I will, is this: even if we do run a small deficit, we do not all turn into pumpkins. The Grits were earlier trying to claim, on the basis of who know's whose numbers, that the Tories would run a "$12-billion deficit." Even if that were true, which I doubt, that's $12-billion over five years, or a little more than $2-billion a year -- they could fund it out of the contingency reserve. And even if they did not, that's $2-billion, on a GDP in excess of $1.4-trillion. That's not even rounding error. It's rounding error on the rounding error.

I don't like deficits any more than the next guy -- less than most -- but let's get real here."


Or in other words, he doesn't like deficits any more than the next guy, but if they are *Conservative* deficits, he will downplay them.

I remember, back when the Reform party was new and shiny in the early 1990's, they were among the most intense deficit hawks in the country. Now, certainly the fiscal situation was drastically improved since then, but I am troubled by how far the Reform/Conservative party has moved from their old stance.

Some U.S. perspective,
"Since 1946 the Democratic Presidents increased the national debt an average of only 3.7% per year when they were in office. The Republican Presidents stay at an average increase of 9.3% per year. Over the last 59 years Republican Presidents have out borrowed Democratic Presidents by almost a three to one ratio. That is, for every dollar a Democratic President has raised the national debt in the past 59 years Republican Presidents have raised the debt by $2.87.

Prior to the Neo-Conservative take over of the Republican Party there was not much difference between the two parties debt philosophy, they both worked together to minimize it. However the debt has been on a steady incline ever since the Reagan Presidency. The only exception to the steep increase over the last 25 was during the Clinton Presidency, where he brought spending under control and the debt growth down to almost zero.

Comparing the borrowing habits of the two parties since 1981, when the Neo-Conservative movement really took hold, it is extremely obvious that the big spenders in Washington are Republican Presidents. Looking at the only Democratic President since 1981, Clinton, who raised the national debt an average of 4.3% per year; the Republican Presidents (Reagan, Bush, and Bush) raised the debt an average of 10.8% per year. That is, for every dollar a Democratic President has raised the national debt in the past 25 years Republican Presidents have raised the debt by $2.59. Any way you look at it Conservative Republican Presidents can not control government spending, yet as the graph above clearly shows, Clinton did."


Some Ontario perspective here.

Despite making severe cuts to social programs, the Harris government was only able to balance the books with the help of creative accounting and asset sales (often selling things for well below their value - see the highway 407 story for the worst example). Once these tactics had been used up, the debt resumed it's uphill march, despite Ontario (along with the rest of the continent) recording very strong economic growth over that period. By way of contrast, the Liberal federal government balanced the budget and then consistently ran surplusses over the same period.

The reasoning why neo-Conservative governments are prone to running large deficits is fairly straightforward. In the comments at Azerbic, Jay Currie notes that if the Conservatives take power, the various Conservative factions (social conservatives, red tories, libertarians, etc.) will then start battling with each other to get their agenda implemented. In order to keep the party together, the Conservatives will have to try and focus on areas of agreement.

For a number of reasons, running a deficit makes this a lot easier. For one thing, it allows the government to painlessly (except for the interest we pay for the rest of our lives) bring in a tax cut, which pleases all factions of the Conservative party. In fact, tax cuts are probably the only thing that all the Conservative factions agree on, which in itself goes a long way to explaining neo-Conservative deficits.

Another factor is that Conservatives generally have an anti-government mindset and often believe that government is just some black hole which sucks up money and does nothing. This leads them to believe they can make significant cuts to government and they won't have any impact. Once in power, much like your typical hapless reality show contestant, they realize that governing is harder (and more important) than it looks and they don't end up making the cuts they thought they would (or they do and people end up dying - see Walkerton).

This is compounded by the fact that Conservatives generally count rural and agricultural communities among their supporters and these communities tend to be both the strongest in their anti-government rhetoric and also in the fierceness with which they defend any government handouts they receive.

But surely, you say, Conservative supporters are fiscally conservative and will turn against their party if it runs deficits?

The practical response is to note that said fiscal conservatives, who can be counted on to scream loud and long if a left-wing government runs a deficit, have historically remained eerily silent in the presence of Conservative deficits. See the U.S. situation today, or go back to Coyne's column to get a taste of what is to come in Canada. Perhaps this is because these Conservatives would rather suffer deficits under a Conservative government than face an alternative party gaining power, or perhaps they don't mind if deficits are caused by tax cuts and only oppose deficits caused by social spending or perhaps many of these Conservatives are just blindly partisan. I don't know the reasons, but I do know what I have seen and heard, and especially what I have not seen or heard, both in Ontario and in the United States.

Furthermore, social conservatives are generally indifferent to fiscal issues. After all, if this world is just a test of our morals (and especially if you believe, as millions do, that the end is near) what difference does the budget surplus /deficit make?

Finally, there are a number of Conservatives (especially libertarians) who like deficits because they realize (correctly) that running deficits is one of the most effective ways to cripple government. As more and more tax dollars goes to interest payments, people see less and less benefit to their tax dollars, and support for government decreases. As an added benefit, when the deficit creating government is finally defeated, the new government that takes over will have to focus their energy on reducing the deficit, making unpopular cuts rather than implementing their agenda.

Obviously, I can't say for sure what will happen under a Conservative government. Maybe enough of that old Reform small c-conservatism remains and they will keep us in the black, but if I was betting man, I'd bet that a Conservative government which lasts more than 2 years will put us in deficit sooner or later.

Then we will see whether our hard-learned lesson about deficits (manifested as a fear of turning into pumpkins if we run a deficit) is still remembered, or if the deficit apologists will come out in force and we will begin the slide down the slippery slope into large Bush-style, day-of-reckoning-is-coming deficits.

15 Comments:

  • Excelent post Declan.

    "even if we do run a small deficit, we do not all turn into pumpkins."

    You know, when the NDP says this might have to happen in an emergency, despite their commitment to balanced budgets, its usually Monte and the other CPC guys that jump all over us (and ignore the fact that it is well thought out Keynsian economics).

    So it is with more than a little ironic glee that I read this. I hope more people pick up an this. While sounding good on the suface, the CPC platform worries me. As you said earlier, the seem no to have a grasp on "collective action problems" and are setting us up for all sorts of (bad) (un)intended consequences.

    By Blogger Mike, at 12:25 PM  

  • That was a nice read.

    Reading this reminded me of something from the book, 'What's the Matter With Kansas?', which I seem to recall you quoting this book once on the website. Basically, reading this reminded me of when Thomas Frank discusses why some conservatives stay with the Republican Party even though they disagree with the social conservative side of it. They stay because at the end of the day they are getting their tax cuts, which is all they want. Here, with the Conservative Party as well, as long as those involved get their tax cuts that's all they care about.

    I think it will be interesting to see how some of the Conservatives, particularly the old Reformers react once they are in office. Only one of them was ever a Cabinent Minister before federally and that was Rob Nicholson. If Garth Turner is elected, that's a 2nd. Most of them will be new to government and it will be interesting to see their reaction to actually having to govern.

    By Blogger Bailey, at 1:58 PM  

  • I don't think the US comparison of administrations is particularly relevant here, unless you include another essential variable: Which party controlled congress under a given administration.

    Reagan would not have had such high deficits, nor Clinton such low ones, had it not been for divided government.

    Imagine Reagan with a Republican House (Reps. had the Senate). The social-spending cuts would have been deeper.

    Now imagine Clinton with Democratic House and Senate even after 1994. (Well, first of all, he would not have been reelected, but that's another story...) The spending cuts that Gingrich and Co. forced on Clinton would not have happened, probably including the welfare reform (a campaign pledge that Clinton abandoned upon election till Republicans forced it back on the agenda in 1995).

    I'm not endorsing either party's budgetary approach. Far from it. Just saying that we can't understand US fiscal policy only by looking at which party has the presidency.

    By Anonymous Matthew Shugart, at 2:45 PM  

  • Excellent post indeed. I may end up using this later in the week when I do up my own evaluation of the CPC election campaign and all the promises they have made versus their ability to cost it all out. As far as I am concerned what I have seen the CPC doing is running a stealth campaign that feels way too similar to the 2000 GWB Presidential campaign, and that really worries me.

    Indeed, I have been a reluctant Liberal supporter not because I think they really deserve reelection, but because whatever else their sins their economic record is one that I respect, and that if Harper and the CPC lost again that this would hopefully initiate a purge of the Reformers that dominate the leadership of the CPC and allow more representation by the red Tory/PCPC wing of the Conservative party/movement in this country.

    What I am seeing on the economic side from the CPC worries me as much, possibly even more so, than the social conservative agenda that has been so carefully muzzled in this election campaign by the CPC head office. This is not a good scenario we are seeing, and I pray that the majority of Canadian voters are not in the end successfully conned by the CPC. Unfortunately, the trends do not look good, but there is still a week to go, and things can shift rapidly, but I am not hopeful.

    The CPC has done a really good job of suddenly presenting themselves as centrists, and Layton damn him helped Harper and the CPC become seen as acceptable when he made them out to be a party he could work with in a minority government. Indeed, Layton has been played by Harper, and played extensively. My one consolation if a CPC majority happens is that Layton will almost certainly be pitched from the leadership since it was his choice to trigger this election, and he did so in the belief he could increase the power of the NDP. Well, in a majority the NDP are going to be ignored, especially by a CPC majority.

    By Blogger Scotian, at 2:53 PM  

  • Would you calm down? I'm still opposed to running deficits, whether incurred by left-wing or right-wing governments. I was one of the few dogmatic enough on this point to object to Tim O'Neill's paper, for instance. My point was simply that we do not live in a Micawberian universe, in which we are alternately plunged into happiness or misery depending on whether annual income happens to exceed annual outlays by sixpence or the reverse. We do not, as I say, turn into pumpkins the minute the clock strikes deficit.
    The damage doesn't come from a single year's deficit, especially one as trivial as the Liberals are in such hysterics over -- $2-billion, on a $1.4-trillion economy. As a believer that Keynes has met his own definition of the long run, I don't believe deficits have much effect either way, good or bad, provided there is a quick return to balance. The damage comes when you run a series of large deficits, such as we did in the 1980s and 90s.
    I see exactly zero likelihood of that in the Tory platform -- or the Liberal platform, for that matter (the two differ by scant billions over the next five years, during which time each would tax and spend close to $1-trillion). When you are balancing your books on the backs of $35-billion annual operating surpluses, just offsetting the cost of servicing the debt, there is an overwhelming built-in bias to surpluses. It's simple arithmetic: if you are taking in roughly 5 dollars in revenues for every 4 dollars in spending, then even if spending grows at the same proportionate pace as revenues -- that is, if spending grows much faster than the 3% needed to cover inflation and population growth -- the surplus continues to swell.
    That's the "payoff," if you want to call it that, for allowing the debt to get as out of hand as we did: we built up so much fiscal momentum, after so many years of leaning against the wind -- raising taxes and cutting spending, year after year after year, in a desperate effort to get ahead of the rapidly compounding debt -- that once we got over the hump, and deficits became surpluses, we found ourselves in a situation of almost unstoppable plenty. Our situation is very different from that of the US, precisely because they never got into quite the same hole we did, and never had to take the same extraordinary measures as we did to get out of it.
    That doesn't mean it's impossible to fall back into it. But it's hard to see how either the Conservative or the Liberal platforms would do that. In the Tory case, they still have some $38-billion in surpluses left over, including the contingency reserve, even after all their spending and tax cuts are taken into account. Will the cost of "fixing the fiscal imbalance" have to come out of that? Yes it will. It will "cost" however much of it they choose to allocate to it. It's wholly discretionary, not least because the "fiscal imbalance" itself is a fiction. It's just the provinces' way of saying "more."
    Will the Tories have to reduce spending -- from its projected growth track -- by $23-billion over five years to make their sums work? Yes they will: $23-billion, or about 2.5% of total spending of $920-billion in the same period.
    One last point: your history of the Harris years, though often repeated, is flat wrong. You can find the data on my site: there was no tax-cut induced revenue crunch in the Harris years. Revenues shot up, both in real per capita terms and as a percentage of GDP. Harris had revenues that Bob Rae and David Peterson could only dream about. The problem, exacerbated greatly by his hapless successor(s), was the failure to control spending. Which is how most deficits are born.

    By Blogger AC, at 3:51 PM  

  • Mike - over the years, the NDP and its supporters and left leaning think tanks have made enough comments about how the debt and deficit is unimportant that I can appreciate why people are quick to jump on them on this issue. But right wing parties - the Conservatives in this case - seem to get (pretty much) a free pass on this issue, despite recent history suggesting this is unwise.

    ----

    Bailey - Good point - it wasn't conscious of it when I was writing the post, but now that you mention it, I probably was influenced by 'What's the Matter With Kansas' in my thinking.

    ----

    Matthew - point taken. I think I've mentioned at some point (either here or at my STV blog) how it's funny how a different institutional design means that, in the U.S., one party controlling the government is associated with fiscal recklessness while divided government is associated with restraint, whereas here in Canada it is the majority government which people feel has the power to restrain itself, and minority governments which are prone to overspending.

    So you're certainly right that I'm oversimplifying the U.S. situation, but I still think that Democrats have generally shown much more fiscal restraint than Republicans over the last few decades, even allowing for the particular circumstances of each government.

    ----

    Scotian - I think we're in agreement on our worries about Conservative fiscal policies. I'm less critical of Layton though, I think he has been doing the best he can for his party. He is in a difficult situation, and his job is not to support the Liberals even if not supporting them means a Conservative majority government.

    I think Layton would only be in trouble if the NDP fails to improve its seat total.

    ----

    AC - You don't have to convince me of your deficit disliking credentials - it is because of them that I am so worried to see you wavering a little! The same comment from almost anyone else wouldn't have bothered me as much, but it is the principled conservatives who will be needed most if the Conservative fiscal situation gets (or starts to get) out of hand.

    And I certainly agree that a small deficit won't hurt us all that much (although it is a lost opportunity to pay down more debt before the boomers start retiring). My bigger worry is that a small deficit will lead psychologically to acceptance of a large deficit. The U.S. experience has shown how quickly a positive fiscal situation can be turned into a negative one if the circumstances are right (wrong).

    You are right that the two countries have different debt-fighting histories, and I hope you are also right that deficit hating is bred a little deeper into our bones up here (as I explained in my post).

    As for Harris, flat wrong seems a little harsh. They did make deep cuts to social programs (although spending still rose, mainly thanks to health care expenses), they did sell assets to balance the books and the house of cards did fall apart eventually leading to renewed deficits.

    Still, looking into it, you have a point that tax rates weren't the only culprit in the deficits. The best analysis I could find was this one by Andrew Spicer, which I followed to Ontario's public accounts.

    Some comments: per Spicer, spending on social services was down 42%, from 19% of GDP to 12% of GDP over the Harris government.

    Per the public accounts, the fastest growing areas of revenue were sales taxes and corporate taxes, despite neither of these taxes having their rate increased (as far as I remember), which suggests that tax revenue as a % of GDP is just higher when the economy is strong, which makes sense (for corporate tax, anyway).

    So it seems that if Harris had not brought in such deep income tax cuts, the budget would have remained balanced, despite the spending increases over the 2001-2003 span.

    One way or another, they governed through prosperous times and left with a large deficit.

    By Blogger Declan, at 5:31 PM  

  • If,
    a) revenues were up under Harris
    b) 1,000s of public service jobs were eliminated, and
    c) there was still a deficit;

    Then,
    Where'd all the money go? I believe it's more likely that the private sector reaped huge windfalls in contracts which is why big business always likes voodoo economists.

    By Blogger Polunatic, at 5:58 PM  

  • Well, according to both Spicer and the public accounts, the short answer is probably health care. Costs were up 10% (after inflation), to make up 38% of total spending by the end of Harris and Eves tenure.

    Part of this was to make up for reduced federal spending on health and part of it was just the general rise in health costs that all provinces have experienced.

    General government expenses were up 132% over the period (Spicer comments that it must be all the consultants) but that still only brings it up to 5% of total spending.

    At least a billion or two probably went into misguided energy poicies such as the rate cap but that probably didn't have a huge impact on the total numbers either.

    By Blogger Declan, at 9:49 PM  

  • What's more worrisome is how the Liberals seem to be entering a post Mulroney phase where it could take them years to rebuild. Media already discussing whether Martin will resign on election night as discussed here:

    Martin's Future

    By Anonymous Anonymous, at 5:13 AM  

  • Great Blog. I've enjoyed the post and the comments. And finally some intelligent discussion.

    By Blogger Brian FInch, at 10:52 AM  

  • Declan--actually, I do not think there is any 1:1 relationship between divided government in the US and fiscal restraint. My Reagan example was of one in which divided government produced a less restrained outcome than would have been likely if Republicans had been in the majority (in both houses, instead of just one). The Clinton example was a case of restraint being greater by divided government than it would have been with the president's party being in the majority (in either house). (Maybe the key is split control of congress, not congress vs. president?)

    It really depends on what the preferences of each party are at any given time with respect to fiscal policy, and then whether one of those parties is enabled (unified government) or has to cut deals with the other (divided government).

    Since most presidents in recent decades have been Republicans, it is not likely that the partisan coloration of the executive is the most important variable. And since most congresses have not been controlled by the president's party over those same decades, it's kind of hard to say divided government alone is the key variable.

    It's more complex than either of those explanations, unfortunately. :-)

    But on a more important question, why don't I know about your STV blog??

    By Anonymous Matthew, at 2:03 PM  

  • Clearly I need to give the U.S. situation more thought. I've certainly seen many people comment to the effect that they thought divided government in the U.S. is better for controlling spending, although perhaps they are just uninformed as well :)

    My STV blog was only set-up for the referendum here in B.C. and is now defunct (since end of May, 2005) which is why you won't have seen it - although it remains online.

    I didn't have any great insight in my posts, some of which were cross posted to this blog. Perhaps the most interesting element, in hindsight, is that I tried to catalogue all the blogs which came out in support of or in opposition to the proposed system (as well as those which took no position but discussed the referendum all the same).

    Interesting note: Looking up the old STV blog, I decided to check to see if it still got any traffic and I see that I am getting some from 'make my vote count' in the U.K., which links both my STV blog and your own.

    By Blogger Declan, at 5:21 PM  

  • IF there is a deficit it will be the fault of the Liberals who have gone on a hectic pre-election vote-buying spending spree for the past few months, spending over $2 billion per day.

    If Harper were to become PM, he could always steal $48 billion from the workers' EI fund to create $9 billion surpluses if needed, just like Paul Martin did.

    By Anonymous Cheryl, at 12:53 PM  

  • Yes, I am sure that if the Conservatives go into deficit they will blame it on the Liberals.

    As for EI, I'm not sure the word 'steal' means what you seem to think it does, but certainly, as the Prime Minister, Harper will have control over how much money is spent on various programs which should give him the necessary tools to either cause or prevent a deficit from occurring.

    By Blogger Declan, at 2:53 PM  

  • The EI surplus has now reached $54.4 billion at March 31, 2007, from $50.8 billion a year earlier, $1.6 billion coming from current operations + $2.0 billion from interest revenue. This is 12.6% of aggregate insured earnings (of $429 billion), thus for someone earning $40000 or more, the corresponding amount is $5,040 per worker. (Source: Report on Plans and Priorities of HRSDC, pages 122, 126 and 138)

    By Anonymous Anonymous, at 5:55 PM  

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