Montreal, March 20, 2017 - With the next federal budget just around the corner, the MEI wants to remind the government that running budget deficits in order to stimulate the economy is a policy which is doomed to failure, and which can even have the opposite effect.
Ottawa should instead take some inspiration from Quebec and British Columbia. These provinces have shown that it is possible for a government to stimulate the economy without running a deficit, by creating a favourable economic environment, which many label "austerity" but which is really simply the prudent management of public funds. British Columbia has thus balanced its budget for the fifth year in a row, and all indications are that Quebec is getting ready to do the same for a third straight year, with surpluses no less.
"The performance of these provinces should not surprise us," explains Mathieu Bédard, Economist at the MEI. "In the wake of the 2008 financial crisis, it is the OECD countries that reduced both their public spending and their revenues that succeeded in achieving the fastest average annual growth. Conversely, countries that chose to increase both their spending and their tax burdens experienced very slow growth, and even economic contraction if Greece is included in the calculation.
Large deficits mean more taxes, sooner or later. Even though current interest rates are low, loans have to be paid back, and it is taxpayers who will ultimately foot the bill.
"The federal deficit for this year is already $14 billion, with three months left to go in the fiscal year," says Mr. Bédard. "This obsession with stimulating the economy through government spending, when Canada is not even in a period of recession, is costly for taxpayers, with questionable results. These billions represent future taxes to be paid by all Canadians."
Recent examples from the scientific literature contradict many Bay Street economists who push for deficits as tools for boosting the economy. In fact, public spending hikes tend to reduce private spending and create sustainable employment only in the public sector. "The best way to stimulate growth is to remove obstacles for entrepreneurs and innovators by reducing taxes and the regulatory burden," concludes Germain Belzile, Senior Associate Researcher at the MEI.
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The Montreal Economic Institute is an independent, non-partisan, not-for-profit research and educational organization. Through its studies and its conferences, the MEI stimulates debate on public policies in Quebec and across Canada by proposing wealth-creating reforms based on market mechanisms.
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