The great British economist Adam Smith wrote in The Wealth of Nations that countries should be run like any well-managed household: they shouldn’t spend more revenue than they raise.
It’s a time-honoured principle. Every family, farmer and small business owner in Canada knows that if you continuously spend more money than you make you’ll eventually go bankrupt.
Why, then, does that same principle never seem to apply to governments, which routinely run deficits regardless of which party holds the reins of power?
Most Canadians would agree that we have to begin paying down our national debt, but we can only do that if we first start balancing the federal budget.
Following decades of budget shortfalls and an international credit rating downgrade, Canada moved aggressively under the leadership of former Prime Minister Jean Chrétien to stop the nation’s downward spiral deeper into debt. But after getting our fiscal house in order and producing a consecutive string of budget surpluses, Canada’s federal government returned to its free-spending ways and started running deficits once again.
So how do we stop governments from running deficits all the time and saddling future generations with massive debt?
One solution I would support is legislation that prohibits governments from borrowing more money than what they raise through taxes. If governments want to spend more, they need to tax more — and then face the consequences of their actions at the election polls. You can be assured that governments will tread — and tax — carefully or risk the wrath of Canadian voters come election day.
The other benefit with this approach is that voters will have a better idea of the cost attached to various programs that governments want to bring forward. Voters could then better assess whether or not they want to fork over more taxes for a new government initiative.
But if the cost of new programs is buried deep down the well of deficit financing, voters might be more inclined to leave the tab for future generations to pay. Either way, it boils down to paying taxes today or paying them tomorrow. And if the decision is to postpone paying until some point in the future, we need to ask if it’s morally right to burden future taxpayers with the bill for services that we consume today.
Most importantly, by having to strictly adhere to a balanced budget, governments will be forced to prioritize. They’ll have to pick and choose the most important areas that require funding. This is something all of us have to do every day when it comes to our personal life or households. The same goes for businesses. So why shouldn’t it also apply to governments?
One of the problems with balanced budget legislation is that future governments can override or repeal the balanced budget decree. Another flaw is that it usually contains a loophole that allows governments to run a deficit during times of crisis or a national emergency. Although this escape clause appears reasonable on the surface, governments usually play fast and loose with the definition of what constitutes a crisis. The result is never-ending deficits. Even so, an imperfect restraint on spending is better than none at all.
Given that Canadian governments — both federal and provincial — so rarely balance the budget, a lot of Canadians could be forgiven for wondering if it really matters.
But it does matter, and here’s why: if we keep running budget deficits and fail to pay down the debt, the interest on the debt will keep growing, devouring a larger and larger chunk of the budget — money that could otherwise have gone toward other social or economic priorities such as more liveable pensions for Canada’s seniors or expanded health care.
At a certain point, the debt becomes a classic vicious cycle, where you have to keep borrowing more just to pay the increased interest on the debt, which in turn makes the debt grow even larger and results in higher interest payments, and on and on it goes until it reaches a breaking point. Anyone who has had to borrow money just to make the monthly minimum payment on their credit card knows first-hand what this feels like.
Either way, Canadians need to push for changes that will tie the hands of free-spending politicians so that governments cannot spend more than they bring in through taxes. At a minimum, the government should commit to balancing the budget within three years and begin directing a portion of the budget surplus toward paying down our national debt, currently pegged at a whopping $1.2 trillion dollars and growing by more than $140 million per day.
It’s time for government to loosen the grip it has around the neck of the goose that lays the golden egg and start cleaning up the fiscal mess it created.