Is deficit spending or a balanced budget the best course of action for the Canadian economy moving forward?
Economic experts Ian Lee and Scott Clark faced off on that important question on The West Block, with Lee arguing that deficits are an “extraordinarily powerful tool” that should only be used in emergencies.
Deficits “should only be used in the most exceptional circumstances such as the Great Depression, such as that savage recession of 1980-81, ’82 when interest rates went to 20 per cent and of course, the most recent Great Recession of 2008-09, perhaps 2010,” Lee said. “Right now, we’re growing slowly. We’re growing anemically for sure. I don’t dispute that, but to advocate deficit financing just because we’re unhappy with the rate of growth is to use a deficit tool in an indiscriminate and profligate manner.”
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Lee added that governments often lack the discipline to climb back out of a deficit situation.
Clark, however, disagreed.
“Well, I’ve worked for every finance minister since 1978 to 2001, and I can assure you that every one of them had political backbone,” he said. Clark countered that under former prime minister Pierre Trudeau, “budget deficit went up but it didn’t go up in any which way. Over his period, as a share of GDP, it fell. Where the deficit got out of control was during the Conservative era under Brian Mulroney.”
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In the 1980s, Clark explained, double digit rates of inflation, high unemployment rates and a rising debt-to-GDP ratio were major problems.
“During that period, the Conservative government actually was running surpluses on its operating budget. They did cut spending. They did raise taxes. Not enough, mind you, but when you’re dealing with double-digit interest rates and double-digit inflation rates, you cannot increase the operating surplus fast enough to pay for the rising interest rates. So it was a global situation that led to a 1993-95 problem. We dealt with that problem in 1995 and it wasn’t to eliminate the deficit for the sake of having a zero deficit or a budget balance.”
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