Three things to know about federal balanced budget legislation (BBL):
1. Are the feds serious about BBL? The 2013 federal throne speech promised legislation that “will require balanced budgets during normal economic times, and concrete timelines for returning to balance in the event of an economic crisis.”
2. When would this legislation occur? During this session of parliament but, like the promises from the last election for income-splitting, it would not occur before the government achieves budget balance circa 2015.
3. What do “normal economic times” and “concrete timelines for returning to balance” mean? There was no indication in the throne speech, but these and other details of the actual legislation will be important to watch.
Three myths about balanced budget legislation:
Myth #1: BBL will change the way governments spend. The throne speech explicitly links BBL with “reducing the cost of government,” indicating a move toward smaller and more efficient government that is attractive to economic conservatives.
The reality: While governments may intend to “live within their means”, our study of BBL at the provincial level in Canadian Public Policy/Analyse de Politiques found that the legislation had little discernible effect in restraining spending relative to revenues. As a result, provinces were unable to avert deficits during the economic recession that began in 2008, and most suspended their BBL.
Myth #2: The federal government can lean on provincial experience to craft superior legislation.
The reality: The provinces have been fine-tuning their legislation since 1995, introducing fiscal stabilization funds with specific targets, defining abnormal times, tightening accounting regulations, imposing non-compliance penalties on cabinet ministers, and relaxing the budget balancing cycle (commonly achieving balance over four years rather than annually). Yet the legislation uniformly collapsed in the face of its first real test.
Myth #3: If budgets are balanced, all will be in order fiscally and economically.
The reality: The provinces, faced with drastic cuts to core services to balance the budget in 2008 and beyond, could not justify the spending reductions necessary to make up the revenue shortfall. It is also difficult to justify spending cuts when public fiscal stimulus is needed to offset private belt-tightening. The argument for fiscal stimulus, if not for maintenance of core services, will be even stronger at the federal than the provincial level. The question is therefore whether the federal government can cut spending to accumulate a sufficient “rainy day” fund that, based on the last recession, would have to exceed $165 billion. Superior federal taxing authority, such as restoring the GST to 7%, could help but is probably not in the cards. Without such a fund, federal BBL would likely collapse in a recession as well, unless it is less stringent than its provincial counterparts.
Continue the IPAC Impact discussion on fiscal rules by reading Dr. Stephen Tapp's post, "Can balanced budget legislation really work in Canada?"
Wayne Simpson is a Professor in the Department of Economics at the University of Manitoba. He is a graduate of the University of Saskatchewan and the London School of Economics. He is a specialist in labour economics, urban and regional economics, applied microeconomics, quantitative methods and social policy, and has worked for the Bank of Canada and Economic Council of Canada. He is the author of Urban Structure and the Labour Market: Analysis of Worker Mobility, Commuting and Underemployment in Cities (1992) and co-author (with D. Hum) of Income Maintenance, Work Effort and the Canadian Mincome Experiment (1991) and Maintaining a Competitive Workforce (1996). He has published more than 50 refereed articles in economics and policy journals as well as numerous technical and research reports, book chapters, and other articles. For further details on his professional activity, see his curriculum vitae.