Here we go again

Spring is typically budget season for the world's major economies. One of the first out of the blocks will be UK Chancellor of the Exchequer Rishi Sunak, who will be introducing his first full pandemic era budget next week.

Right on cue, the bad advice is starting to surface.  Here is former Chancellor Philip (now Lord) Hammond, warning that the Chancellor (and by implication PM Boris Johnson) have become "addicted to spending", making them unlikely even to consider the steps needed to rein in spending as the pandemic eases.  (And here is an alternative viewpoint). To be fair to his Lordship, he is not suggesting that Sunak start cutting back on pandemic support programs next week; he seems to accept that digging out of the fiscal hole the pandemic has created will take years or even decades. Still, you might hope that Hammond would think back to the austerity that the Cameron/Osborne government imposed on the UK in response to the global financial crisis. That austerity weighed on growth for much of the following decade, ensuring that targets for eliminating the budget deficit were never attained.

We are likely to see the same thing here in Canada, where a firm date for the Federal Budget has not yet been announced. The opposition Tories have been very critical of the scale of the pandemic support programs the Trudeau government has launched, which have indeed been about the most generous of any developed country. However, to be fair once again to a former Tory (a habit I do not intend to get into), at the time of the global financial crisis PM Stephen Harper listened to advice and eschewed austerity measures that would have tipped the economy deeper into recession. As a result the Canadian economy and financial system came through the crisis in better shape than the rest of the G7.

The Tories recently demoted their attack dog finance critic, Pierre Poilievre, to the lesser role of labour critic. It is not clear whether party leader Erin O'Toole found Poilievre's ranting a bit too much, but there is little likelihood that the Tories will tone down their fiscal rhetoric in the coming weeks. History suggests that it's not a winning approach to take with the Canadian electorate, but that's obviously O'Toole's call.

For Canada, the UK and just about every other country, the scale of deficit financing undertaken in the past year is not sustainable. This is true not because of the old canard about leaving unpayable debts to our grandchildren, but because excessive financial stimulus must eventually heighten inflation risks. Governments certainly need to be cautious about keeping the spending going as economies recover, a message that may not yet have got through to Justin Trudeau and his rookie Finance Minister, Chrystia Freeland. That said, history is replete with examples of governments discovering that outright austerity only reduces growth and never reduces debt. More such history is not what we need right now.