Why Canada needs a 'debt brake'
Finance Minister Joe Oliver talks to the media after meeting with private sector economists in Ottawa, April 9, 2015. (REUTERS/Patrick Doyle)
Federal Finance Minister Joe Oliver recently announced that the federal government will bring in ‘balanced budget’ legislation alongside their balanced budget next week, and pundits across the country were quick to call out the Conservative government for its hypocrisy.
Sure, it’s easy to note that the largest deficits in Canada’s history have occurred in the last few years and under the watch of the Harper Conservatives. Once fiscal hawks, this government has added more than $100 billion to the federal debt since it took office. And yes, the new legislation still allows deficits during times of war or recessions; particularly ironic given that Canada has been out of an official recession since 2010 and yet, the Harper Conservatives have since run consecutive deficits nonetheless.
Regardless of these obvious contradictions – which anyone can identify and point out, and many in the media continue to do – it’s also important to note a good policy when we see one, and to let our politicians know when they’ve done something right. It’s called positive reinforcement.
We cry foul when they introduce new spending measures or waste our tax dollars, so it’s only fair to applaud new measures designed to limit spending, cut back on waste, and show some semblance of care for the young and future taxpayers who will inherit the mountains of debt racked up by today’s politicians.
Particularly praiseworthy from Oliver’s balanced budget law is the personal financial incentive built into the legislation. If the government cannot figure out a way to balance the books, cabinet ministers and top bureaucrats are held individually accountable by taking a 5% pay cut.
This is not to discount the obvious limits of such legislation. The government of the day is responsible for amending and imposing laws, so the next government could just as easily pass new legislation to overwrite this bill. Ontarians have lived through this, and were once promised that every proposed tax hike or new tax must be approved by the “explicit consent of Ontario voters.” That is, until the Dalton McGuinty government found that inconvenient, so they chose instead to impose the largest tax hike in a generation with the much-hated health care tax.
Balanced budget laws are only as good as the government of the day and their willingness to stick to their word.
This legislation gives government watchdogs and opposition politicians extra ammunition if the sitting government ever sways course. It provides added incentives for the government to avoid embarrassment and making liars of themselves should they ever decide to overspend.
To say it is impossible for legislation to ensure fiscal responsibility – as many are currently saying – is simply untrue.
Similar legislation has certainly worked and produced tremendous fiscal outcomes, for instance, in Switzerland.
In the late 1990s, the Swiss government introduced a bill designed to reduce its public debt load. The legislation was taken to the Swiss people, where 85% voted in favour of the bill in a national referendum. In 2003, the government introduced a new fiscal instrument known as the ‘debt brake.’
Similar to the balanced budget legislation described by Joe Oliver, the Swiss government created a new constitutional requirement that growth in government spending must be held below the average increase in government revenue, measured over a multi-year period by the department of finance. They put into law that the government must, therefore, ensure the growth in spending only ever grew at the rate of economic growth, and correspondingly, the rate of revenues produced. Because of this simple rule, the Swiss government was always required to use revenues -- and not debt -- to finance its government expenditures.
The ‘debt brake’ has proven to be remarkably effective. Swiss debt declined from 130 billion francs in 2005 to 110 billion in 2010, at a time when every other western government piled on record debt in the face of the 2008 financial crisis and the misguided stimulus programs that followed.
Switzerland managed to reduce its reliance on borrowing – not to mention reduce its debt by 15% – even during a volatile and uncertain recession.
The Harper government’s balanced budget law may not go quite as far as the Swiss model, since governments would still be able to borrow during recessions, but it’s certainly a step in the right direction.
The Swiss ‘debt brake’ and Harper’s new balanced budget legislation offer a glimmer of light in the dark world of government finances. They are imperfect, yes -- but any self-imposed constraints on how politicians spend our money are surely worthy of some praise.