Conservatives become immune to ‘Deficit Desease’
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by Jim Stanford, Economist, Canadian Auto Workers
No. 67, September 3, 2003
How Conservatives Learned to Stop Worrying and Love the Deficit
Everyone knew that George Bush was running up a big deficit in an effort to ensure his re-election next year. But few guessed exactly how enormous that deficit could get, until the non-partisan Congressional Budget Office (CBO) released its semi-annual budget forecast last week.
The CBO expects the federal deficit to equal an all-time record $480 billion (U.S.) next year. Strip out the surplus in the public pension system (most countries, including Canada, exclude these funds from the government's official budget), and the actual deficit is much bigger: a crushing $644 billion.
Worse yet, Bush's desperate effort to pump-prime the economy in time for the election has cast the fiscal die for a decade to come. The CBO predicts accumulated red ink of almost $4 trillion over the next 7 years. only after the legislative authority for Bush's tax cuts expires in 2010, does the budget finally start to creep back up toward a balanced position. In short, the Bush borrowing spree will produce a lasting fiscal hangover for the U.S. economy, enforcing years of restraint and greatly complicating the efforts of Bush (or his successor) to address issues like health care or the electricity grid.
It is interesting to compare the disintegrating U.S. fiscal situation with Canada's own recent brush with fiscal disaster. In Canadian dollar terms, Bush will accumulate over $3000 in debt next year for every man, woman and child in America. In Canada, the worst-ever federal deficit was booked in 1993, when Ottawa spent $42 billion more than it received – or about $1450 per Canadian. By this measure, the U.S. deficit will be twice as large per capita as Canada's worst-ever performance.
Now think back to the debates that were occurring in Canada in 1993. Financial analysts were near-hysterical in their warnings that Canada would soon hit the “debt wall.” Journalists jumped on the Chicken-Little bandwagon, too; W5's exposé of New Zealand's debt crisis was particularly influential, hinting we'd become impoverished sheep farmers if we didn't quickly staunch the fiscal bleeding. A new generation of neoconservative politicians rode the deficit issue to electoral success. Even Liberals heeded the call, abandoning their 1993 election promise to focus on job-creation and elevating deficit-reduction to the top of their agenda – thus defining the political course of the man who will become our twenty-first Prime Minister.
What's startling is the absence of any similar sense of panic about the U.S. deficit. The financial community has been particularly silent. There has been a lot written about the surging deficit, of course, much of it sceptical. But I have not seen the words “debt wall” mentioned once. U.S. bonds have not been downgraded. No-one compares the U.S. to New Zealand.
The financial gurus who railed against Canada's once-spendthrift ways are unconcerned by Bush's deficit mostly because they like what he's spending the money on: a huge dividend tax cut targeted precisely at their own clients. If a government goes into deficit to support EI benefits or social programs, financiers experience paroxysms of alarm. But if a government goes even deeper into deficit to put more money into the pockets of financial investors… well, that's a deficit the Street can learn to love.
The outbreak of deficit disease has been highly contagious among Canadian conservatives, too. B.C.'s neocon Liberals are the biggest culprit, piling up $8 billion in red ink during their first three budgets – more than all other Canadian provinces combined. These deficits almost perfectly reflect the value of corporate and personal income tax cuts the Liberals handed out after their election. No wonder the reaction from the financial community has been just a tad less aggressive than if an NDP government deficit-financed $8 billion worth of social programs.
But this year's award for most deficit-happy province in Confederation may be captured by another unlikely band of free-spenders: ontario's Conservatives. The provincial government tabled a nominally balanced budget in March. But independent analysts, reading between the lines, pegged the true deficit at roughly $2 billion (after adjusting for unidentified asset sales and unconfirmed federal transfer payments). Since then, of course, things have gotten much worse: SARS, the blackout, and plunging exports now make it impossible for ontario to balance its budget without huge spending cuts. With an election in the offing, however, the Eves team is headed the other direction: cutting taxes and announcing new spending like there's no tomorrow. The Tories will cling to the official fiction of a balanced budget until the votes are counted. only then (if they're still in power) will they own up and force ontarians to foot the bill, one way or the other.
I'm not jumping on any deficit-fearing bandwagon here. Even the ontario and B.C. deficits are small potatoes in the big economic picture. And if they were the result of useful government initiatives (rather than high-income tax cuts), they'd be quite acceptable – downright useful, in fact, during a time of macroeconomic weakness.
What's shocking is the hypocrisy of North America's conservatives, who have suddenly embraced deficits now that they are politically convenient. Just as galling is the blind eye which most of the financial community has turned to this new right-wing profligacy. For both conservatives and financiers, it seems, it's not whether a government spends too much that matters. It's for whom that money is being spent.
http://www.caw.ca/news/factsfromthefringe/issue67.asp
@ September 21, 2003