Breaking a campaign promise at the start of a mandate can lead to heavy and long-lived criticism. Just ask Dalton McGuinty, who, facing a large and unexpected deficit, broke his promise not to raise taxes when he took office in 2003.
Whoever becomes prime minister after the October 14 election will immediately be confronted with the question of whether to honour the promise, made by all party leaders, not to run a deficit. The economic rationale for a deficit now is clearcut: when a recession hits the private sector, government can and must take up the slack and stimulate demand.
Even if the government doesn’t change its policies, we are likely headed for a deficit, because tax revenues will go down and transfer payments such as employment insurance will go up. To raise taxes or cut spending to avoid this automatic deficit will make the recession worse.
If the new government decides to run a deficit, there are two ways to do it. One would be to cut taxes, thereby putting money in consumers’ pockets. This is what the Conservatives did when they cut the GST earlier in the year, and what the US government did when it gave taxpayers tax rebates totally roughly $150 billion.
The second alternative would be to spend the money directly. A fiscal stimulus package could be built around the idea of rebuilding Canada’s infrastructure, with investments in areas such as health, the knowledge economy, and transportation. I prefer the infrastructure approach because I think it has a bigger immediate impact and puts in place investments (for example hospitals, research infrastructure, public transit) that will strengthen our economic performance in the future.
Given Canada’s strong federal finances, we can afford some short term deficit spending to stimulate the economy. The challenge will be to structure the program and define its terms, for example its duration, carefully. So we need both quick action and careful thinking. Let’s hope that our professional public service is hard at work on planning an economic recovery program, so they can hand it to the new prime minister as soon as the votes are counted.