Canada’s Unhealthy Obsession with a Balanced Budget

Canada is in the middle of both an election, and a recession. Why Canada is in a recession is obvious, and clear. What is not as clear is why Canada remains obsessed with having a “balanced” budget when it’s obvious that increasing government spending (mostly through social safety nets) has been the proven ointment for recessions. What’s more curious is that Canada has one of the lowest central government debt-to-GDP in the advanced world, at 51% of GDP. Canada has lots of room to spend.

If we are to compare two similar sized economies and populations, let’s consider France. Canada has close to the same population and economy of scale to France. Canada also has one of the world’s richest natural resource caches.

GDP Canada:France

Yes, France has a 9% bigger GDP, but they also have a 9% higher population, so it all washes out in the end, especially in GDP per capita. Canada’s GDP per capita is actually higher than France’s.

GDP per capita

The point is that France is the second largest economy in the Eurozone (behind only Germany). France has a positive social safety net, and while France’s recovery from the Great Recession has been tepid (about +1.3%), it isn’t that unusual from other Eurozone countries. France’s GDP growth has been exceeding Canada’s, but here’s the kicker: France’s economy has outpaced Canada with a central government debt of 103% of GDP, while Canada’s Central Government debt is only 51% of GDP

Govmt debt

For added irony, typically when a country has its own currency, its own sovereign debt, and it’s own AAA Credit rating (as Canada does), running a slightly higher debt to GDP (a.k.a. a budget deficit) to ease a recession is not a big deal. It helps a lot of people with little consequence in the long run.

Yet out of the three parties running in the Canadian election, two are promising balanced budgets, and very unrealistically. The election cycle is getting downright nasty on the balanced budget issue. This brings back not-so-fond memories of the balanced budget amendment in the 1990s in the United States. Conservatives in the U.S. gave up on the idea that the country could actually function without debt; not to mention the debt has actually fallen over the long run.

Add to that the reality that no country ever in history that has had its own fiat currency with active trade has ever been debt free. None.

Canada has more than enough room to add a little debt, beef up some social safety net programs in a recession, and being debt free shouldn’t even be a consideration. Yet it’s election politics. Having an unhealthy obsession with a balanced budget in the middle of a recession is going to have some heavy social costs. If they don’t, then that will be the Great Canadian tragedy for the next four years.

This entry was posted in Economics, Political Economy, Politics, Public Policy, Socioeconomics. Bookmark the permalink.

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