Blogs & Comment

Don’t scrap the Balanced Budget Act—make it better

The Liberals and the NDP both dismiss the Conservatives’ balanced budget law, but the core idea is sound

Prime Minister Stephen Harper

Prime Minister Stephen Harper. (Sean Kilpatrick/CP)

Mike Moffatt, an assistant professor at the University of Western Ontario’s Ivey School of Business and a fellow Canadian Business columnist, has taken it upon himself to popularize “statutory recession.”

It is a dig at the Federal Balanced Budget Act, which Prime Minister Stephen Harper made law weeks before triggering this year’s forever election campaign. Harper’s fiscal straightjacket threatens cabinet ministers and senior bureaucrats with a pay cut if they oversee a deficit. One of the few escape clauses is a recession, which the statute defines as “a period of at least two consecutive quarters of negative growth in real gross domestic product as reported by Statistics Canada under the Statistics Act.” Canada’s GDP contracted at an annual rate of 0.5% in the first quarter, and shrunk 0.8% in the second quarter, according to StatsCan. Voila, “statutory recession.”

Harper’s opponents dismiss the law. Justin Trudeau, leader of the the Liberal Party, would scrap it and schedule deficits through the end of the decade to spend big on infrastructure. New Democratic Party chief Thomas Mulcair says he doesn’t need a statute to force him to run a balanced budget. He promises to do so next year, if elected, by raising corporate taxes to offset new spending plans. The prime minister senses the public harbours doubts about his opponents’ accounting skills. Harper attacks Trudeau as “reckless” and Mulcair as, well, a socialist. (We all know what that means!)

Mulcair and Trudeau have left themselves open to these attacks by underestimating the potential of Harper’s balanced-budget law. There is nothing inherently wrong with fiscal rules. Eighty-nine countries had implemented some form of statutory debt restraint through the end of 2014, according to the International Monetary Fund. Such laws are useful in showing skeptical bond investors that a nation is serious about kicking old habits of profligacy. They also allow voters to hold politicians to account.

The problem with Harper’s budget restraint is that it is too severe. The best fiscal rules are more flexible, promising to keep the structural deficit in check, for example, or pledging to balance the budget over a number of  years.

Mulcair and Trudeau could shield themselves from Harper’s attacks by promising to overhaul the Balanced Budget Act—or in Mulcair’s case, by embracing it. They would stand a better chance of winning over voters who are excessively sensitive about the budget.