Fiscal policy and smear campaigns

In the current political environment, a government running a deficit is bad bad bad. We have reverted to ideas that dominated economic thought in the 1930s – that budgets should always be balanced. This sentiment is reflected in modern budgeting practices that add contingency reserves and fiscal cushions to already lowballed estimates of revenues, so that even if the economy were to really tank, the worst outcome would be a balanced budget, and under business as usual, the budget is biased in favour of big surpluses.

So with Bob Rae looking more like a probable winner of the anyone-but-Iggy games that will dominate the Liberal leadership convention, I can just feel the Tory smear machine revving up. Putting aside the many criticisms from the left of Rae’s tenure as Premier of Ontario, I think the “fiscal profligacy” meme is going to be the biggest line of attack should Rae win.

In that spirit, I was reflecting on those Rae days. I graduated from Western in 1991 with a BA in Economics, and hit the labour market right when the economy was in the tank. It was a tough time, but one that taught me more about economics than I learned in school. My head full of great theory about the wonders of markets, I hit reality hard. I could not find a job and spent most of my first summer after graduation unemployed and depressed, and even got a welfare cheque. I was close to spinning out altogether when I got a great job as a research assistant at Queen’s Park’s Legislative Research Service, which enabled me to make it to grad school the next year.

What does my own experience in 1991 mean for Bob Rae in 2007? It is important to recognize that the 1990-91 recession was a deep one, the worst since the Great Depression. Ontario’s manufacturing base was particularly hard hit between high interest rate policies emanating from the Bank of Canada to stamp out inflation and the fallout of the Canada-US free trade agreement (policies that were praised by my Western profs), both of which amplified the business cycle turn to recession.

Ontario’s deficit was about $3 billion in 1990/91, around the time that the Rae government came to power. The next year it swelled to just under $11 billion, then hit $12.4 billion in 1992/93 before starting its decline to $11.2 billion in 1993/94, and $10.1 billion in 1994/95. From there it declined steadily up to budget balance in 1999/00, but would have happened much sooner were it not for the Harris tax cuts after 1995.

These deficits, of course, have to be stacked against the economic circumstances of the day. In 1991, real GDP fell by 3.9%, and then grew by about 1% each of the next two years before gaining some strength in 1994. By then the damage was done and the NDP’s days were numbered. Even then, the economy was characterized by “jobless growth” and really did not start firing on all cylinders until 1997.

Ontario’s deficits, while met with such hostility from corporate Ontario, actually made the recession less painful for Ontarians than it would otherwise have been. The deficit was 3.9% of GDP in 1991/92, and 4.3% in 1992/93, before falling to 3.8% in 1993/94 and 3.2% in 1994/95. Just imagine how bad it would have been were those each balanced budgets. And once Ontario’s economy turned around, deficits shrank rather quickly.

I was one of the beneficiaries of those deficits and my rather small fall into the social safety net made a huge difference in my life, now that I look back on it. Dealing with social assistance bureaucracies these days is a much more horrific experience.

None of this should be interpreted as an endorsement of Rae’s campaign, but I hope some of these subtleties come out when and if Rae has to defend his record as Premier. His fiscal policies during that recession and the “jobless growth” that followed it were the right ones.