Prime Minister Stephen Harper speaks to reporters in Copenhagen.Sean Kilpatrick
It's early in 1993. Canada has finally escaped the grips of a recession, but it's facing a record budget deficit. It's also facing an election. An upstart political movement that included a bright young economist called Stephen Harper will take advantage of this backdrop to fashion an electoral breakthrough, promising a simple fix to Canada's fiscal woes.
The Reform Party campaigned on a pledge that the "federal government shall forthwith enact a law under which all future increases in total revenue must be exceeded by reductions in overall expenditure until the budget is balanced." A Reform government also would have required that the budget be balanced over each three-year period. Failure to do so would result in an election.
Reform was an early adopter of the idea of making fiscal prudence a statutory requirement. In 1990, only seven members of the International Monetary Fund had adopted such rules, according to a recent study by the institution. Today, at least 80 countries have done so.
Already, 2010 feels a little like 1993. The recession will continue to loom over most discussions. The federal budget deficit, projected to be about $56-billion, will set a new record in nominal terms. There might even be an election.
Missing is any hint from Mr. Harper, who is the most visible reminder of the Conservative government's base in the Reform movement, about codifying his promise to erase the deficit.
The government's contention that it can balance the budget by essentially controlling the growth of spending over the next five years has been roundly criticized as hopelessly optimistic by former deputy ministers of finance and Bay Street economists. The idea behind forsaking deficits through legislation is to bolster confidence in a government's commitment to fiscal discretion. What better way to silence Mr. Harper's critics? In June, Germany's government, approaching a vote amid rising deficits, amended the constitution to set a maximum allowable federal deficit.
The IMF study found that on average the use of fiscal rules was associated with improved fiscal performance. But their implementation tended to follow budget cuts and other measures aimed at controlling spending or paying off debt. That poses a chicken-and-egg argument: Do balanced-budget laws force austerity, or are they a badge for those governments who are prepared to enact those policies anyway?
Another intriguing finding in the IMF study is that deficit and debt controls have little connection to the risk premiums that bond traders demand on government debt. In other words: Having a balanced-budget law doesn't necessarily mean that investors will lend you money more cheaply. It seems the people who dictate what it costs governments to borrow are more interested in deeds than documentation. The Prime Minister, who has become less doctrinaire since 1993, might realize he needs to try another credo in 2010: Show, don't tell.