Provinces, states know balanced-budget laws a double-edged sword, experts say

OTTAWA – The Conservative government is promising to introduce a new balanced-budget bill, something that’s already the law of the land in several provinces, all but one U.S. state and a slate of European countries.

But is there any real point to balanced-budget laws?

In the U.S. and Canada, they’ve left many states and provinces badly strapped for cash during tough economic times, and they’re often scrapped anyway in the event of sputtering growth, grinding recessions or natural disasters.

Economic experts on both sides of the Canada-U.S. border say balanced budget legislation makes for good public relations, but meaningless public policy.

“Governments get to change their minds; that’s why we have elections to choose who runs governments,” Finn Poschmann, head of research at the C.D. Howe Institute, said Thursday.

So long as a duly elected government has the power to override any balanced-budget law that’s on the books, the inherent promise to honour it is “thoroughly empty, in the legal sense,” Poschmann said.

“It has practical purpose only as an expression of political will. That’s worth something, but not much.”

In a 2011 study on balanced-budget legislation in Canada’s western provinces, academics Jared Wesley and Wayne Simpson found that legislative requirements to stay in the black largely went up in smoke when the economy hit the skids in 2008.

During the recession, “governments could not, or would not, raise major taxes and had to suspend balanced budget legislation,” Wesley and Simpson, professors at the University of Manitoba, noted in their study.

In Wednesday’s throne speech, the federal government pledged to “enshrine in law” its intention to balance the books. But the Tories gave themselves some wiggle room by stipulating that the new legislation would set “concrete timelines for returning to balance in the event of an economic crisis.”

The Tories also promised to freeze the overall federal operating budget and restrain hiring and cut costs in the public sector by reforming disability and sick-day entitlements for bureaucrats. It vowed to enact “further targeted reductions” to internal spending, although it didn’t offer any details.

In an interview from Manitoba, Simpson said those cost-cutting measures are likely part of the government’s formula for success for the federal government’s balanced-budget aspirations.

“Governments have to realize that recessions are inevitable, and they have to be prepared for them,” said Simpson, an economics professor.

“If they don’t change their expenditure practices, then they’re not going to be ready, and they’re going to have to scrap any balanced-budget legislation.”

Canadian provinces, dealing with increasing health and education costs in the face of dramatically shrinking tax revenues during times of recession, face a much tougher task keeping their books balanced than the federal government does, Simpson added.

“The feds are much more masters of their own house. If they can squirrel away some money and achieve a fiscal surplus year after year, then they might have what they need to withstand a recession, and their balanced-budget legislation can survive.”

Jock Finlayson, chief policy officer at the Business Council of British Columbia and one of the country’s leading economic prognosticators, agreed that the federal government has a shot at success that has eluded most provinces and American states.

“In the provinces, revenues are more volatile; it can be much more difficult to achieve success with balanced-budget legislation,” he said.

“The federal government, however, is in a better position because it has by far the largest tax base in the country. The law might also serve to provide an incentive for discipline; to stiffen the spines of policy-makers in government. Without any statutory requirement, there isn’t the same amount of discipline on the spending side.”

But Finlayson wondered about the specific criteria the government would use to determine when it is necessary to run a deficit.

“The question becomes how do you define economic hard times, what are the caveats, how would you measure an economy that isn’t functioning properly? Do you have a recession? Does growth slow down, and by how much? That will be the big challenge for Ottawa if they actually implement this.”

He also urged the federal government to examine carefully what happened in the U.S. during the 2008 recession.

Forty-nine of 50 U.S. states have a constitutional requirement to balance their operating budgets, Finlayson pointed out. Federally, some congressional Republicans have pushed for a balanced-budget amendment to the U.S. Constitution, but so far they’ve been unsuccessful.

“That would be a very perilous path for the federal government, because the constitutional requirements in the states have been a source of enormous distress to state governments,” he said.

“They’re really had to put their budgets through the meat grinder to respond to the recession and the sharp fall in revenues. Hopefully, some of those experiences might shape what the legislation in Canada will look like.”

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