Friday, September 30, 2005

Tying one's own hands

In an apparent effort to woo soft Con voters, the Libs are looking at legislation to mandate balanced budgets:
The so-called "no deficit rule" has been in effect since the budget was balanced in 1997-98, but it remains a convention rather than a legislated requirement. The legislation, which may come as part of Mr. Goodale's fall fiscal update, will also likely commit the government to reducing the debt/GDP ratio to 25% by 2014, from the current 39%.

Now, one would expect most people to wonder why an effective convention needs to be replaced by legislation. But surely the financial industry would be happy with the move, right?
Don Drummond, chief economist at TD Bank Financial Group, said a guarantee against deficits was "horrifically bad policy. This is entirely political. We have created an 11th principle 'thou shalt never go into deficit' but the impact of a $1- or $2-billion deficit in an economy our size would be irrelevant. The whole thing seems bizarre."

Tim O'Neill, the chief economist at Bank of Montreal who was asked to review Canadian fiscal forecasting this year by Mr. Goodale, concluded the no-deficit rule was a major cause of the persistent inaccuracies in budget forecasting that have seen the government continually under-estimate large surpluses.

Mr. O'Neill recommended the government instead balance its budget over an economic cycle, which would allow deficits to be incurred when warranted by economic circumstances.

There's much to be said for running the government like a business - and part of that has to include looking at the bigger picture, rather than putting the numbers on a single financial statement ahead of good overall policy. In some down years, that's bound to mean running a deficit no matter how well the government is run.

Not that some of the implicit alternatives are all that great either. Systematic deficits should be avoided, and I'd worry that the "economic cycle" put forward by O'Neill could be easily manipulated by governments claiming that an upturn is just around the corner. But given that neither of those problems exists as the government is being run now, there's no good reason to give the force of law to an arbitrary fiscal policy.

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