Whenever a federal government of any partisan stripe passes a budget that runs a deficit, a common criticism is that the government is acting irresponsibly. The logic goes, if households or businesses ran their budgets like the federal government, they would quickly go bankrupt.
That criticism resonates for obvious reasons. Anyone familiar with personal or business finances knows there is an unavoidable wall you hit when you spend more than you make for too long. However, despite it sounding right, this comparison between a deficit in the federal government’s budget to a household budget betrays a pretty fundamental misunderstanding of how government finances work. This misunderstanding serves to obfuscate the very important role governments have historically played in encouraging economic sustainability, especially in times of crisis.
To put it simply, households and businesses don’t have central banks or control their own currencies. They also can’t issue bonds that are guaranteed to be purchased. Businesses and households also don’t hold the power and responsibility to stimulate demand in the economy, subsidize key industries, pay for national defense or maintain a social safety net that keeps people from falling into poverty. It’s comparing apples to oranges, to put it mildly.
Fundamentally, when governments spend money, that money doesn’t just disappear. It goes to towards paying civil servants, funding grants for various projects, running schools and hospitals, or into infrastructure. For the most part, aside from money spent abroad in the form of foreign aid or certain defense spending, most of the money that passes out of government hands ends up in the Canadian private sector one way or another.
Data generally suggests that government spending stimulates the economy. Economists of the Modern Monetary School of thought found that balance budgets are frequently correlated with slow or non-existent economic growth, for the simple fact that less money is being circulated in the economy when governments balance the books.
Deficits, of course, cause debt, but that debt is far more complicated than a mortgage or a credit card bill.
Aside from a few semi-independent microstates, no country in the world is without debt.
Unlike households and businesses, no one could or should expect any country to repay its entire debt. Government debt is an inbuilt part of the global economy, being the lynch pin of the global monetary system. Some economic historians go so far as to theorize that money would have no value without government debt.
Therefore, to a large degree, running a deficit is not that big of a deal. This is not to advocate for endless profligate government spending, as there are real limits to the size of the deficit that can be sustained, however by most conventional economic indicators, Canada is far from that threshold.
This is all very important to keep in mind as we enter a recession. Government spending can play a crucial role in stimulating economic activity when the market fails to do so. The public works programs of the 1930s or the economic boom between the end of the Second World War and the 1970s took place at a time when the government wasn’t shy about getting involved in the economy.
This legacy history actually shows how the recent budget passed by the federal government is far from perfect. Government spending and intervention in the economy still pales in comparison to the Keynesian golden age of the 1950s and 60s. It says a lot that one government’s favorite selling point of this current budget are provisions that give money away through subsidies and tax breaks to already profitable private companies. All of this is to say that the current budget doesn’t seem to be as ambitious as it could have been considering the number of socio-economic problems faced by our society. But fundamentally its problems do not include the deficit if your goal is avoiding worse economic outcomes in the short to medium term.
Comparing government to a household is an easy talking point, but as with many talking points, the reality is a bit more complicated.
Brett Thoms
