Wednesday, May 27, 2009

Don't blame the economy

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As we all know, Finance Minister Jim Flaherty announced yesterday that the government's 2009-2010 budget deficit will be upwards of $50 billion dollars, rather than the originally planned $33.7 billion laid out in the budget.

Surely, though, this is simply a result of poorer-than-expected economic performance, right? The finance minister and government couldn't be at fault.

Not quite, says Terence Corcoran.

... blaming growing deficits on the recession and unforeseen turns in the economy is a political device rather than a solid explanation. Today's deficits in Ottawa are a direct product of five years of fiscal expansionism and continued spending increases. Spending has been rising at twice the rate of population growth and inflation, an unsustainable trend.

In a commentary today in the Financial Post, the Fraser Institute's Niels Veldhuis plots the numbers. Mostly under a Conservative government, average annual spending rose 6.2%, exactly double the rate of growth suggested by the increase in population and inflation. Spending this year is heading for a gain of more than 10% - before taking into account the final auto bailout numbers.

When governments run up big spending increases during boom times - as Ottawa and all the province did - then there's nothing left to tap into when the economy slows down. There's no buffer. Revenues fall and spending growth increases, creating a deficit trap from which there is no escape other than waiting for the private economy to catch up with public spending and begin the "Now you pay for it" phase.

Veldhuis, in his article, suggests legal restrictions on government spending to help to keep it from getting out of control as it has in Canada and, to be fair, all over the world. Canadians ought to see his point.

Cross posted to the Shotgun.

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