Ah, here we go again – when seeking to assert credibility as sound fiscal managers, governments reach for the tired gimmick of “balanced budget legislation” (BBL). It’s not about good economics. Nor about good public policy. Just crass politics. And now the federal government is once again dangling this useless policy ploy.
What we’ve long understood is this: BBL is bad policy because it rules out doing what governments should do during times of economic recession or depression, or in the face of other more pressing social and environmental needs. The federal government of R.B. Bennett prioritized trying to balance the budget through much of the Great Depression of the 1930s. For this we do not applaud them; rather, we rightly hold them responsible for unnecessarily deepening and prolonging the Depression. They failed to heed the advice of the great economist John Maynard Keynes, who recommended that in times of economic downturn, good policy prescribes running a deficit in order to give the economy a needed boost.
If, however, the government chooses to draft legislation that is sufficiently flexible to avoid these dismal scenarios, then it is merely a cynical political stunt, and should be recognized as such. Meaning, BBL is either bad policy or bad politics – a fiscal straight-jacket or smoke-and-mirrors – take your pick.
BBL is perhaps most damaging because of how it defines the role of government. Good government and budgets are about more than balancing the books. Good budgets should equally be about smoothing out the inevitable boom and bust cycles of market economies; offsetting the growing gap between rich and poor by engaging in some redistribution of income and wealth; caring for the poor and elderly; helping the unemployed; building up a society’s infrastructure; providing for people’s health and education; and protecting the environment. BBL limits a government’s ability to properly perform all these functions.
In practice, every provincial government that has brought in such legislation has had to scrap or amend it. Simply put, any legislation that has to be amended any time the economy sours is just bad legislation.
As we warned (and as the BC government has demonstrated on many occasions now, rightly running deficit budgets after the 2008 downturn), BBL simply does not work. That’s because when economic times are good, balancing the budget is relatively easy (rising revenues make balancing the budget quite realizable and thus BBL is unnecessary); but when economic times are bad and revenues decline, trying to balance the budget would only compound an economic downturn — it’s bad policy that would bind the hands of government and prevent it from taking needed action to combat a recession, forcing it instead to pile onto the economic bad news with more spending cuts.