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Sean Speer: Can fiscal conservatism be saved?
Friday, 29 December 2017 - 9:45am
SPECIAL TO THE GLOBE AND MAIL
PUBLISHED DECEMBER 29, 2017UPDATED DECEMBER 29, 2017
It seems like only yesterday that balanced budgets, disciplined spending and limited government were healthy and growing trends
Sean Speer is a Munk Senior Fellow for fiscal policy at the Macdonald-Laurier Institute and former senior economic adviser to Stephen Harper.
Is fiscal conservatism dead?
Current trends in Canada, the United States and other developed countries certainly suggest that it's deteriorating as an intellectual and political force.
While it may not be time to read it its last rites, there's no doubt it's in serious need of resuscitation.
It seems like only yesterday that balanced budgets, disciplined spending and limited government were healthy and growing trends. U.S. President Bill Clinton's famous line that the "era of big government is over" in the mid-1990s seemed to mark the height of fiscal conservatism's vitality.
Canada was illustrative in this regard. Federal and provincial governments went from running combined deficits of $65-billion in 1993 to recording a budgetary surplus of almost $22-billion in 2008. The federal debt-to-GDP ratio was cut by more than half over roughly the same period. Total government spending as a share of the economy was reduced by more than a third.
A burgeoning political consensus seemed to emerge in favour of sound public finances. Liberal finance minister Paul Martin's formulation about "arithmetic [over] ideology" brought expression to this multipartisan commitment to bringing revenues and outlays into regular balance.
Similar progress was made in the United States. Washington ended a string of almost 30 consecutive deficits in 1998. It recorded four straight surpluses totalling more than $550-billion (U.S.). The federal debt-to-GDP ratio fell by more than a sixth between 1995 and 2000. The odd political alliance between Mr. Clinton and Republican House Speaker Newt Gingrich seemed to be a harbinger of a new bipartisan emphasis on "pay-as-you-go" budgeting.
This was remarkable progress for fiscal conservatives. It had been a long process of idea generation, dissemination and political advocacy that at times must have seemed an impossible cause. A confluence of intellectual change and fiscal crises ultimately led to the breakthrough. It was a sea change from the high-spending, high-deficit orthodoxy of the previous two decades or so.
But the fiscal conservatism that was to replace it is now facing its own existential challenge. The prognosis is not good.
Ottawa and virtually every province are running budget deficits. The Trudeau government has increased spending by 20 per cent in its first three years. It is now projected to run consecutive deficits until roughly 2045. This is far from the crisis conditions of the mid-1990s, but the trends are nevertheless worrying. A fiscal complacency has set in across the country. Current budget shortfalls are principally about overspending rather than "investment" or business-cycle effects. There are now growing concerns about the long-term fiscal sustainability of several provinces.
The conditions are even worse in Washington, where the federal debt is almost 80 per cent of GDP and amounts to more than $120,000 per household. Still, deficits and debt seem to be nowhere on the political agenda. Even former fiscal hawks such as the Office of Management and Budget director Mick Mulvaney are now minimizing fiscal concerns. A new round of tax cuts without any offsetting spending reforms will serve to drive up the annual deficit and exacerbate long-term fiscal challenges. Pay-as-you-go has been replaced by sending IOUs to future generations.
Why was the epoch of fiscal conservatism so seemingly short-lived? Did such a consensus ever really exist? Or is it possible that claims of its passing are overstated?
It now seems clear that this period of fiscal reform in the 1990s was somewhat unique. An interplay between increasing awareness of the depth of the fiscal crisis and significant revenue growth caused by a buoyant economy created the economic and political conditions for uncharacteristic fiscal progress. The public was persuaded to accept temporary actions to reduce spending, and rising revenues helped do the rest.
Unique political configurations were also a key part of the policy-making context. The Liberal government in Ottawa was pushed, prodded and ultimately supported by the new Reform Party in opposition (including newly elected MP Stephen Harper) to cut spending and reduce the deficit. The divided government in Washington gave considerable leverage to congressional Republicans, led by Mr. Gingrich, to advance deficit reduction with the Democrats of the White House.
The political process tends to be biased in favour of more spending and higher deficits. Fiscal conservatism is invariably disadvantaged.
In hindsight, it was probably overreaching to characterize what happened during this roughly five-year period as a new intellectual and political paradigm. It's notable, for instance, that federal program spending in Canada was already back to almost 10-per-cent growth in 2000-01 and exceeded 6 per cent, on average, for the subsequent seven years before the global economic recession. The budget was balanced but it concealed a nascent departure from spending discipline and limited government. In fact, balanced budgets became the only real limiting principle and, in a world of considerable revenue growth, imposed few hard choices. The same goes for the United States. Washington was back to running deficits by 2002. Fiscal reform was ostensibly more of a short-term aberration than a new political rule.
The fiscal pressure caused by the global financial crisis only hastened fiscal conservatism's malady. Soon, a combination of declining revenues and discretionary stimulus spending drove Canadian and U.S. governments back into deficits and debt. Ottawa's deficit reached 3.5 per cent of GDP. Washington's exceeded $1-trillion for four consecutive years. Any semblance of fiscal conservatism was abandoned to deal with the economic crisis.
What seems clear now is that this episode of deficit spending lowered the political threshold for government profligacy. The Harper government saw the federal deficit as temporary and exercised considerable fiscal discipline to stick to countercyclical prescriptions. The timelines for returning to budgetary balance bounced around a bit but ultimately landed where the government had first committed back in 2009. But while Ottawa was determined to avoid a return to long-term deficit spending, the unmooring of federal fiscal policy from a balanced-budget objective seems to have had broader political effects. It gave symbolic licence and focus-group-tested arguments to those who wished to eschew the prerecession model in favour of more spending and a return to budget deficits even in a period of economic growth. Deficits essentially begot more deficits.
The 2015 federal election is a case in point. The Conservatives and New Democrats assumed the parties would revert to the pro-balanced budget consensus. Yet the Liberals chose a deficit-financed path based mostly on empty hand-waving about the need to "kick-start" the economy. It worked. It was a clear political differentiator that polling indicates drew a large number of voters. The Conservatives couldn't find the vocabulary to challenge the Liberal plan, in part because the proposed deficit spending seemed negligible and in part because the Conservative government had itself run deficits.
This is how a burgeoning political consensus started to unravel in a mere decade or two. The truth is that fiscal conservatism wasn't sustained beyond immediate-term efforts to balance the budget. As soon as that was done, the political system generally returned to previous fiscal behaviours. The global recession only exacerbated this trend. And politicians subsequently used this experience to bolster their case for more spending, higher deficits and debt accumulation. It was an unvirtuous cycle that has us back on a familiar fiscal path.
Now, it's not to diminish the progress that was made or to claim that it had no lasting policy and political effects. Ottawa maintained balanced budgets until the outbreak of the recession in 2008-09 and, in so doing, reduced the overall debt burden and significantly lowered the federal debt-to-GDP ratio. Privatization and other structural reforms have had lasting effects on the size and scope of government. Federal program spending is still a few percentage points lower than it was in the early 1990s, and total government spending is considerably lower than its previous peak. Polls suggest Canadian voters might punish the Trudeau government if it transparently puts federal finances in great peril. Our situation is manifestly better than that of the United States, where the prevailing narrative about political discord obscures a bipartisan consensus in favour of fiscal inaction. These are positive signs.
But there remain political obstacles to reviving fiscal conservatism. That the Ontario Progressive Conservative Party's newly released platform commits to only minimal efforts to improve the province's poor fiscal conditions is evidence of this dynamic. The political process tends to be biased in favour of more spending and higher deficits. Fiscal conservatism is invariably disadvantaged.
A principal challenge is the difficulty of competing in the political arena with a spendthrift opponent. A message of fiscal discipline (to say nothing of fiscal retrenchment) tends to be less inspiring than the action orientation of a political party unconcerned about how it will pay for its promises. We've seen this dynamic play out at the national level and in Ontario. Those concerned with fiscal discipline have yet to find the political vocabulary to present a positive and compelling alternative inside a balanced budget framework. This cannot be overstated: Unless we develop and popularize such a vision, fiscal conservatism will continue to be a mostly aberrant political force that only realizes progress in periods of fiscal crisis or by fluke.
Some fiscal conservatives blame political actors for these circumstances. The argument is that unprincipled politicians too often choose political expediency over making the case for what they know is right. The result is a "me-too" fiscal policy that's mostly indistinguishable from centre-left alternatives. There's some truth to this criticism. The path of least resistance is often too well-trodden.
But over all this critique strikes me as incomplete. It ignores the role of non-political voices in shaping the political environment and public debate. Critics of current fiscal trends must also look inward. It should involve a deeper introspection on the part of those who think, write and talk about fiscal conservatism (including me) to understand our own failures.
Why have we failed to persuade the public of the need for budgetary reform? Why are the political conditions still tilted in favour of deficits and debt? What is a compelling political vision rooted in a foundation of balanced budgets, disciplined spending and limited government? It's ultimately up to us to search for answers to these questions if we are to revive fiscal conservatism.
The recent tax policy debate in the United States shows that it's probably already dead there. There are some signs that it's still alive here. But we can't take that for granted. Curative action is needed. The case for fiscal conservatism is still a long way from recovery.