What the treasury does we call fiscal policy, but it’s essentially budgeting: determining levels of revenue (taxes) and expenditure (all the programs and administration the federal government spends money on).
Fiscal policy or government budgeting is unique in that it affects the entire economy.
When the government runs a deficit – spends more than it collects in taxes – this puts money into the pockets of citizens and businesses. This leads to jobs and prosperity when we’re in a recession and have high unemployment.
When, as now, we’re not in a recession and have low unemployment, this excess government spending can lead to inflation.
Surpluses occur when the amount government collects in taxes is greater than what it spends. We don’t see this very often.
Surpluses are good when an economy is suffering from inflation or overheating. Taking money out of the economy helps cool things down.
Surpluses are also useful in that they allow government to put money in the bank in good times so it can run deficits when the economy is slow without going into debt.
Unfortunately, and in spite of promises to the contrary, the current Liberal government has consistently run deficits – projected at $20 billion for this year and next, and $15 billion the year following.
Since we haven’t accumulated surpluses, the deficits contribute to a national debt that’s growing at over $100 billion a year.
If fiscal policy is like budgeting, how can the government get so deeply into debt and have that debt continue to grow?
Any individual or company that consistently spent more than their income and had ever-growing debts would see the cost of borrowing rise and soon run out of credit.
Governments are different. Especially in stable countries like Canada, they have almost unlimited credit.
Debts are financed by selling government bonds. With interest rates low and risks often high, government bonds become a very desirable investment and a good store of value for our retirement savings and other financial assets. When we buy and hold government bonds, we enable the government to continue to spend beyond its means and to increase its debt.
Is this such a bad thing?
Deficit spending stimulates the economy even if it leads to debt. Debt is financed by government bonds, which are usually a desirable asset.
But deficit spending now, with very low unemployment and the economy still growing, may make it harder to increase the level of spending should the economy go into recession. Even governments can see their credit rating deteriorating as deficits persist and debt grows. Borrowing would then carry higher interest charges.
The real problem is that citizens and taxpayers end up carrying the debt. Even if the government can continue to sell enough bonds so it doesn’t have to worry about paying the principal on the debt, it does have to pay the interest. No investor would buy or hold a bond if they feared that the interest would not be paid.
Government revenue is used to pay that interest. Right now, interest rates are very low. Any rise in general interest rates would make the debt burden very much heavier.
Our tax dollars are the government’s revenue. We pay taxes in order to get the goods and services that governments provide like pensions, safety and security, infrastructure, education and health care.
With growing debt, the first call on every tax dollar we pay goes to cover the interest on the debt. It’s not available to add to or maintain any government services or to boost the economy. More likely it will be added to our tax burden.
Before we vote, we should ask candidates and parties about their plans for taxes and spending, deficits and debt.
We will be promised lots of government goodies. These will have to be paid for. Will deficit spending and/or debt be needed?
If so, let’s be very careful about electing a government that’s bribing us with our own money.
Troy Media columnist Roslyn Kunin is a consulting economist and speaker.