The end of the deficit taboo: the economic logic and political perils of Justin Trudeau's promise.

Author:Morley, Gareth

In addition to the force of Justin Trudeau's optimistic personality, an obvious explanation for the Liberals' election victory is that they promised to spend more than they taxed. Focusing just on the amounts promised, there is no reason to fear any serious negative consequences as a result. But the lurking issue is how this victory changes political incentives in the future. The "deficit taboo" is gone--but with it, have we lost the force that keeps democratic politics from leading to a debt crisis?

The Liberal platform announced planned deficits of approximately $9.9 billion, $9.5 billion and $5.7 billion in the first three full fiscal years of the government's mandate. In contrast, the NDP anticipated surpluses of between $3 and $4 billion per year. At least as these things are conventionally viewed, the Liberals thus outflanked their traditional rival on the left. It is hard to know for sure whether this manoeuvre won the Liberals the "change vote," but there is no doubt that the conventional wisdom that deficit spending is electoral suicide has been reversed.

From a purely technocratic point of view, the differences between the Liberal and NDP fiscal platform are not that big a deal. The total federal budget for fiscal year 2015-16 is $290 billion. Even the biggest deficit number is less than 3.5 per cent of the total, and on conservative estimates of economic growth, if the Liberal government sticks to its plan the debt-to-GDP ratio will continue to decline.

The main argument given for the deficits is that they get the economy moving again and generate jobs. Behind this slogan are models of the economy. If the total amount that people in the country wanted to spend were constant (a proposition economists describe as "Say's law"), then more government borrowing would just mean an equal reduction in lending to businesses and individuals. While the mix of jobs would change, the total number would not. But cyclical booms and busts for the entire economy (at least when they are not caused by obvious external events like hurricanes or wars) show that the amount people want to spend is not constant. Sometimes there is a "general glut" where people and resources are left unemployed, even though there are clearly social needs to be fulfilled. At other times people are trying to spend too much relative to what the economy can actually produce, generating inflation.

The classic "old Keynesian" approach was to spend in recessions and tax in...

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