Prudence and the Pilferers

February 5, 2006

This blogicle examines and debunks Canada’s allegedly “prudent” fiscal surplus.

Since 1999-2000 the former Liberal government has run large budget surpluses, typically ranging in the area of 7 to 20 billion dollars. They represent excess revenues (notably from taxation) over current expenditures. Up to 3 billion dollars of these surpluses has been used annually to pay down the national debt (which currently still stands at well over 600 billion). As for the rest, it has generally been allocated to new spending. While there has been some modest tax reduction, nominally aimed at curtailing the surplus, nevertheless the surpluses have continued and grown from a modest amount in 1997-98.

A number of obvious, and brief, points need to be made about this situation at the outset:

  • The excess money represented by the surplus has been collected from taxpayers due to overtaxation. Therefore it belongs to the taxpayers, not to the government.
  • The national debt, of course, also ultimately belongs to everyone in the country (including taxpayers).
  • There are only two legitimate options about what to do with the surplus money: (i) return it to taxpayers, or (ii) use it pay down the debt. In the case of option (ii), it should probably be done on a pre-disclosed basis, in part because it represents a re-distribution of wealth from high to low taxpayers, and partly because people should have a say about the pace at which they will pay off their debt.

It follows that a government’s using up the surplus (or significant parts of it) on new, unannounced non-emergency discretionary spending (that they were not elected for) is not justified. In fact, it is tantamount to theft. And in this case a massive theft of nearly 100 billion that makes the adscam/Gomery scandal look like peanuts. Naturally, the money is used to increase the scope of and entrench the government by allowing them to “provide” politically useful programs. While taxpayers do get some benefit from these programs, that is not the point. Rather, taxpayers did not elect the government to spend their money in this way, and they have the right to allocate it differently or more efficiently themselves.

Of course, the Liberals didn’t call this theft on their part. Instead, their strategy was to first play down the the size of the surplus until its embarrassingly elephantine extent could no longer be denied, and then switch tactics to braying, summon the spin-doctors and apply the adjective “prudent”. The idea being sold here was that it is better to run a modest, prudent surplus than to be constantly in deficit. Few would argue with that choice, but coming to the main issue: have the surpluses been merely prudent, or were they truly excessive? I want to give a logical and simple argument for the latter case, because I haven’t seen it addressed anywhere in this way, and because it’s of crucial importance in assessing a government’s fiscal record (past or future).

Economics is not an exact science. It’s hard enough finding two economists who agree on the details of anything, let alone being able to predict the course of the economy and the spoils of the tax system with sufficient accuracy to balance a nation’s budget regularly.

If the department of finance pursued the noble goal of balancing the budget, then the uncertainties inherent in that economic problem would inevitably result in unbalanced budgets: sometimes a surplus, sometimes a deficit. If their economic predictions were skillful, these errors would tend to be smaller rather than larger. And if there was no systematic bias in their methods, over time the incidence of deficits and surpluses would be about equal, and on average (over time) the budget would just about balance.

Of course, economies tend to run in cycles; a few years of boom, then some of bust. This enhances the probability of, at times (during a recession), having a deficit for two or three years running. Human nature being often focussed on the short term, this might be regarded as worse than it really is. Hence it could be seen as a good idea to put a systematic bias into the economic model and aim to run a modest surplus; that way, if things turned out leaner than expected, the budget may still balance, or very nearly so.

And that really is the key to identifying a prudent fiscal policy: actual surpluses, from year to year, would fall in a range that sometimes, on the low end, led to a nearly balanced budget or even a small deficit. Importantly, this is not what has occurred in Canada over the last many years. Instead, actual surpluses have ranged from about 7 to 20 billion, with the exception of 1.6 billion in 2004-05 when the Liberals were reined in by their precarious status. The surplus, where possible, has therefore been excessive, egregious, and not prudent.

Once this is admitted, then the only remaining escape mechanism from the finger of guilt is pleading incompetence in the economic modelling. But this doesn’t really wash either: incompetent economic predictions would lead to widely ranging outcomes from balance, most likely a sequence of both deficits and surpluses, both large and small from year to year. Even if there was a systematic bias to the incompetence (initially favoring, say, surpluses over deficits), then attempts to correct an evident and unwanted surplus would be as likely as not to overshoot the mark (due to the assumed incompetence) and in some years again lead to deficits.

This too is not the pattern that has been seen. Rather, year in and year out the surpluses have been relatively consistent in their size. This indicates rather clearly, that they have been planned, intentional and self-serving Liberal money grabs, spin-doctored away under the euphemism of prudence.

That particular merry band of thieves is now deposed, although amusingly little damaged by the scandal of their gluttonous surpluses. The Conservatives have promised to clean up in this regard, among many. For them the jury, while still out, should know what to look for.

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