Continued gov’t deficits threaten economic recovery, Fraser Institute claims

Think-tank warns of ‘significant long-term consequences’ from deficit spending

As the Covid pandemic appears to be passing and public relief programs are winding down, questions are starting to be asked as to when governments across Canada will be moving towards balancing their budgets and paying down their massive debts.

In that vein, a new essay released by the B.C.-based Fraser Institute notes that the federal government recorded a $327.7 billion deficit in 2020-21 and a deficit of $113.8 billion in 2021-22.

Deficit larger than 2008

This, the conservative-leaning public policy think-tank notes, is 27.8 per cent larger than the deficit incurred in the aftermath of the 2008 subprime mortgage financial crisis despite a strong recovery.

The Fraser Institute feels that while there was some justification for emergency spending and deficits during 2020 and 2021, “there is little or no justification for a $52.8 billion deficit in 2022,” states the report’s author.

“Some people may think that deficits don’t matter since governments across Canada racked up so many before and during the COVID-19 pandemic,” says Matthew Lau, an adjunct scholar with the Fraser Institute and author of ‘When is it Appropriate to Run Budget Deficits?’

Deficit consequences

He and the institute maintain that there are significant long-term consequences to deficit financing – even if they’re not immediately visible.

The essay acknowledges that there are times when deficits are unavoidable for governments, such as during recessions and other economic shocks like the COVID-19 pandemic.

During such times, unemployment rises, which increases government spending at the same time that government revenues fall, resulting in deficits.

Crowding private sector

However, once the economy starts to recover, such as it is starting to now, government spending normally should decline while revenues increase, allowing for balanced budgets and even surpluses.

The Fraser Institute and its contributing analysts claim that continuing to run deficits during periods of recovery and growth can crowd out and compete with the private sector, which they believe actually can harm recovery and economic growth.

A second essay published recently by the institute, authored by Professor Donald J. Boudreaux of George Mason University in Virginia U.S.A., regarding James M. Buchanan and the Political Economy of Debt Financing, emphasizes theories of public spending first set out by Buchanan, a Nobel-laureate economist.

Burden of repaying deficits of today may fall on future generations, the Fraser Institute maintains

Burden on the future

The essay attempts to explain how the burden of repaying government deficits of today may fall on future generations of taxpayers, who will either have to pay higher taxes or forego other government programs in order to repay public debt.

Boudreaux also sets about to explain how Buchanan warned against deficits because of their corrosive effects on democracy, in that the bills of today’s spending are passed onto the next generation who have no current political voice or decision-making authority.

Spending others’ money

“Buchanan’s warning on government deficits and debt was crystal clear: we spend other people’s money less wisely than we do our own, and that lesson still holds true today,” says Boudreaux.

“It is almost always politically advantageous to spend now and pay later. But doing so unfairly punishes future generations. And so, governments should be restrained in how they spend other peoples’ money.”