Home December 2017 Here Comes the Long Run

Here Comes the Long Run

Frank Atkins.

John Maynard Keynes is often called the father of macroeconomics. If macroeconomics is summed up by the belief that without government spending the economy will collapse, then he is probably the founder of macroeconomics. When asked about the long-run consequences of his policies, Keynes stated that we should not worry about the long run because in the long run we are all dead. Unfortunately, the long run comes faster than Keynes would have us believe.

This is very relevant because of recent statements uttered by Bill Morneau, the minister of finance. Mr. Morneau recently stated the federal government has no plans to return to a balanced budget any time soon. The budget deficit for 2017-18 is expected to be $28.5 billion, including a $3-billion reserve fund. It is not clear how $3 billion will help when the deficit is so high in the first place. In spite of this, the out-of-control spending will continue to increase. The government recently announced plans to pour an additional $180 billion over the next 11 years into the infrastructure void.

We must remember that during the last election, Trudeau the Junior claimed the economy was in trouble and we needed stimulus spending to help the economy. I argued at the time that the economy was in fact doing all right, and Mr. Trudeau actually simply had his father’s genetic predisposition to massive government spending. Now the federal government is finally willing to admit the national economy is performing quite well. However, Mr. Morneau seems to be terribly confused about the state of affairs. Mr. Morneau recently stated, “We find ourselves in this positive position because of the economic approach we have taken.” So, apparently we can thank out-of-control spending for the fact the economy is performing well. Thinking that government spending, which is measured in billions, can stimulate the Canadian economy, which is measured in trillions is, as Preston Manning said a long time ago, like thinking you can start a 747 with a flashlight battery.

Mr. Morneau showed his further confusion by stating, “We are going to continue down that path [deficit spending] and we are going to do it in a fiscally-responsible way.” It is not at all clear to me, or to many other economists, how running a $28.5-billion deficit when the economy is growing is fiscally responsible.

The problem here, that both Mr. Morneau and Mr. Trudeau do not seem to recognize, is that the long run is lurking around the corner. Interest rates are starting to increase, although somewhat slowly in Canada. Eventually, interest rates in Canada will return to more historical levels. With continued deficit spending, and the accompanying increase on federal debt, debt-servicing costs will begin to increase. Eventually, we will not be able to maintain deficit spending while paying the increased debt-servicing costs, and taxes will have to increase, which will have a detrimental effect on economic performance. The result will be an increase in the deficit due to a decrease in tax revenue. The cycle will continue until something drastic is done. This is the long run. Sound familiar? Pierre’s shadow is descending over us one more time.

Frank Atkins is a senior fellow at the Frontier Centre for Public Policy.