Justin Trudeau’s credibility as a fiscal manager is shot; he’ll have to restrain spending to get it back
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New Opposition leader Erin O’Toole senses an opportunity. He said earlier this month that he would balance the budget in a decade, restoring the anchor from the Chrétien-Paul Martin years that O’Toole’s former boss, Stephen Harper, was happy to deploy when he led the Conservatives to power in 2006.
Central bankers for now appear to have run the bond vigilantes that Dodge and others worried about in the 1980s and 1990s out of town.
A balanced budget would restore fiscal credibility in Ottawa, but it might be unnecessarily rigid as a target. The rules of finance have changed since the 1990s. Central banks didn’t know then that they could create hundreds of billions of dollars to buy bonds without stoking runaway inflation. There are probably limits, but central bankers for now appear to have run the bond vigilantes that Dodge and others worried about in the 1980s and 1990s out of town.
That means Trudeau and Freeland have some flexibility. Debt can be gradually eroded by economic growth as long as output increases faster than the government’s borrowing costs. That’s why Trudeau isn’t necessarily lying when he claims he won’t need to raise taxes to get rid of the deficit.
But the new rules of public finance aren’t so established that a government should assume it can borrow cheaply forever. The world is awash in debt, which could re-empower the bond vigilantes. The central banks are trying to stoke inflation; interest rates will rise if they are ever successful. A prudent government would hedge by making it harder for itself to take on more and more debt.
Clark and DeVries suggested keeping the deficit around two or three per cent of GDP, while the C.D. Howe committee leaned towards a spending ceiling. Dodge proposed tapering deficits to one per cent of GDP over the next few years and then lash fiscal policy to a “rock” that would keep debt-service costs below 10 per cent of GDP.
Experts will debate which of those would work best. Any of them would be an improvement.
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