But do the same rules apply to government budgets? How should we judge a provincial or federal budget?
Government budget items must be measured on their benefits to the individual. What we think about each item depends on what it does for us and what it will cost, usually in the form of higher taxes.
So let’s look at the total impact of government budgets. Will government spend more or less than its revenue? What does that mean for us?
These questions are timely. The B.C. and Ontario governments have just brought down budgets. Many other provinces will do so through the spring and the federal government will release its budget on March 22.
The B.C. budget promises a surplus. Increases in government spending will be more than offset by increases in revenue, we are told. For example, health care premiums will be reduced or eliminated for some British Columbians, including children. This is good. Unfortunately, premiums will increase for the rest of us.
Property transfer taxes will be eliminated on newly-built homes under $750,000. However, these taxes will remain on the sale of existing homes in this price range. As well, transfer taxes will increase on homes over $2 million.
Overall, the B.C. government expects to have enough revenue to cover all its new and old programs, and have a surplus it can use to reduce provincial debt. That’s good, since paying interest on debt is one of the least productive uses of taxpayers’ money.
But what about the federal budget? There’s no doubt this won’t be a balanced budget. So by how much will Ottawa’s expenditure in the next year exceed its revenue – how big will the deficit be?
Deficit spending is not always bad. Spending in general keeps a modern economy moving and growing. When an economy is in recession – and consumers and businesses are not spending – then government can boost the economy through deficit spending. The best way to do this is by investing in the infrastructure and human capital that will help produce more jobs and income in the long run.
However, not all government spending does this.
In today’s economic climate, it’s fair to ask if deficit spending or government stimulus is needed at all. The Canadian economy is growing, albeit at a modest pace. It is not declining. Certain sectors, like oil production, are in trouble. But others, like forestry, are picking up. And some, like tourism, are actually booming.
So do we need to incur the costs of deficits now?
The problem with deficits is they usually turn into debt. When governments, like people, spend more than they take in, they have to borrow the difference and pay interest.
There are exceptions. Government projects can turn out to be so productive in the short run that tax revenues rise enough to pay off the costs. Or governments may be able to cover the deficit out of previously accumulated surpluses.
However, most projects won’t generate income for a fairly long time. And governments, like most of us, always seem to have pressing needs and wants that make saving for a rainy day difficult.
So look closely at any federal budget deficit because, by next year, it will be added to the $615-billion existing national debt. The interest on this debt is a first charge against government revenue but it is one of the last items citizens want to see their tax dollars used for. If the money we give the government is not being used to provide the services we want, at least it should help pay down our debt and reduce our interest costs.
From personal and business perspectives, we will like some of the federal budget’s details and not others. But ultimately, we need to look beyond the immediate impact to the budget’s effect in the longer term.
Troy Media columnist Roslyn Kunin is a consulting economist and speaker.