Thursday, January 29, 2009

An Upside Down Budget for a Backwards World

Classic economic theory was that governments should have small operating surpluses during the good times and small deficits during the tough times. This would help balance out the extremes of the business cycle without a massive raid on the treasury. During the 1970s and 1980s this theory was abandoned as governments racked up massive deficits and massive amounts of debt. Towards the end of the 1980s early 1990s there were warnings that if this pattern was not corrected Canada would be in severe economic trouble. The Brian Mulroney Conservative Government introduced the GST. In 1993 the Liberals and Jean Chretien with Finance Minister Paul Martin brought down the $40 billion+ deficit. Eventually they reached a point of year after year of double digit surpluses. Canada was the only country in the G8 that was consistently producing budget surpluses.

When the Conservatives took power in 2006 they considered the massive surpluses as over taxation. Through cutting the GST by 2% and other tax reductions they acted to minimize the size of budget surpluses without going into deficit. The Liberals consistently accused them of taking the country back into deficit.

In October the Canadians went back to the polls. The economic collapse had already begun in the US and was an important consideration during the elections. The Liberals promised a massive spending program to be paid for by a massive tax increase. The Conservatives offered fiscal responsibility and staying the course. They had to change gears when the opposition parties rejected their economic update.

Parliament returned this week with a new budget and a massive economic stimulus package. Many people are referring to this as 'Liberal' budget. This is a very interesting term considering their years of condemning the Conservatives for what they believed was the road to deficit. The good news is it looks like it is a big enough compromise to prevent Canadians from going back to the polls once again.

Economic theory seems to have been turned on it's head. Hopefully this will be the right kind of economic stimulation to help a disastrous economic situation. Hopefully once this passes people will remember that in the long run the government is better off with small surpluses rather then massive deficits.

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