Finance Minister Joe Oliver told a business audience in Toronto Wednesday that the government plans to introduce balanced budget legislation – something that was promised back in 2013.
This policy idea was studied by the office of the Parliamentary Budget Officer in September 2014. The office came out with a report on the subject, providing some context and offering some suggestions on how that legislation should look. Here are some highlights from that report:
1. Balanced budget legislation is pretty common
Twenty-eight of 31 advanced countries who are members of the International Monetary Fund have some form of balanced budget legislation, with only Canada, Iceland and the United States as outliers, according to the report. In Canada, eight provinces and two territories had enacted such legislation, but almost all of them repealed, amended or suspended these laws after they were enacted, or to deal with the 2008 financial crisis. According to the report, seven provinces were expected to have reaffirmed these laws by the end of 2014. Similarly, of the 27 advanced economies with balanced budget laws going into the recession, all but eight had to suspend, modify or remove the legislation at least temporarily.
2. Balanced budgets aren’t very common at the federal level
Federal budget deficits are more common than surpluses, according to the report. From fiscal year 1966-67 to 2012-13, there were deficits in 25 of 47 years, when interest charges are taken into account. The current government hasn’t balanced a budget since 2007-08 (before the recession), though the finance minister is promising this year’s budget, to be introduced April 21, will be different.
3. It’s unclear how well legislation actually helps governments to balance their budgets
The report summarized research on the effects of balanced budget legislation and found mixed results, though in Canada, there have been a few studies that link the legislation to a higher likelihood of actually balancing the budget and other positive budget outcomes. The PBO report also said that governments are more likely to enact balanced budget legislation when finances are improving. This could skew the results.
The report also noted that legislation can “restrict the tools of public policy to smooth the business cycle, change the composition and timing of revenues and public spending, and lead to less transparent budgeting and more frequent policy changes.” It could even “increase the depth and breadth of recessions”. Though, the report said, if the legislation is well-designed, it can avoid these effects.
4. Balanced budget legislation can provide benefits during normal economic times
When there’s no recession, having balanced budget legislation can help to increase national saving and investment, and can lower debt and interest costs, read the report.
5. Legislation should be transparent and flexible
According to the report, any balanced budget legislation should be flexible enough to not limit the government’s ability to fight an economic crisis. The accounts should also not include windfalls from things like asset sales, should be clearly documented in detailed reports, and compliance with the law should be independently monitored.
So far, details on the government’s proposed legislation are thin. During a deficit situation, ministers and deputy ministers would have a five per cent pay cut, and there would be an automatic freeze on operating spending. The legislation would also allow numerous exceptions during times of “extraordinary circumstances”, according to Oliver.
With files from the Canadian Press
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