Dawn of the Debt

You’ve heard this old chestnut before: Governments should be run like a household. As if the biggest single organization in the country has no effect on anything else.

The idea that government budgets and household budgets are comparable in any way goes back at least to the 1930s, when it was used as a rhetorical cudgel against the UK’s progressive government of the era. It was used to try to limit the scope of government in the economy, more broadly, in an era when governments were setting up national health care plans, infrastructure projects, and so on.

Turns out economic thinking has progressed since then, but political thought really hasn’t.

The little economy on the prairie

The federal government is one of the very big sectors in the economy. The three other big sectors are provincial governments, corporations, and households. A much better analogy for our economy is that all four of these sectors are part of the same household; a little economy on the prairie with no one else around.

All of these sectors are sitting around their kitchen table day in and day out.

Those four members are constantly trading with one another—the corporations are giving money to the households (as wages), and the households to the corporations (when they buy things), and the feds are collecting money from households (in taxes) and giving it to the provinces (as transfers). Money is constantly circulating between them.

When one side pays another, the paying side ends up with a deficit, but the receiving side ends up with a surplus. The total amount of money is the same, but who has it changes and we label that “deficit” or “surplus.” For example, when the feds transfer money to households—think of the Canada Emergency Response Benefit (CERB)—the feds are in deficit for that amount, but households are in surplus for the same amount. It’s the same money, “deficit” or “surplus” just tells us who sent it and who received it.

At the end of the year, some of those four members are in surplus and some are in deficit. When the feds are in deficit, it’s often because they’ve been transferring money to other family members, creating surpluses for them. Think, here, of the feds increasing health care transfers to the provinces. It’s no coincidence that the provinces are all declaring big surpluses right now!

When so-called “free market” economists try to describe the federal budget as if it were a household budget, they are ignoring the other three members at the table. They want to treat the federal budget as if it’s something that can be isolated from the broader Canadian economy. It simply doesn’t make sense to do so.

If the federal government aimed for massive surpluses—as some economists and think tanks argue it should—then that money has to come from somewhere: it would have to take it from the others at the table. In practice, that can mean cutting services (to households), raising taxes (on households or corporations), or cutting transfers (to provinces).

Right now, the federal government is in deficit, as it has been for quite some time. Those deficits have grown during the pandemic, as federal services have expanded. That’s a good thing! It means that households, businesses, and provinces are on the other side of the trade declaring surpluses and they’ll have had an easier time keeping their head above water.

Whose deficit is it, anyway?

The idea that the federal government should plan its budget as if it were a household really took off in Canada in the 1980s and 1990s, during those heady days of restructuring the Canadian economy to transfer a larger and larger piece of the pie to corporations.

Unless we realize that deficits go somewhere, we can’t evaluate if we like where they’re going. We might be just fine with federal deficits creating provincial surpluses, but less so if they created massive corporate surpluses (through, say, corporate tax cuts).

If you think about the feds as a member of a household, this becomes obvious. But if you turn off the lights at the kitchen table and shine a flashlight only on the federal government, pretending they is the only occupant of the house, which is generally what economists do, then these trade-offs aren’t obvious.

Economic language readily takes on moral overtones when “deficit” and “surplus” are two sides of the same transaction—you can’t have one without the other. If you want a surplus, say for a government, you better know where the corresponding deficit will be created.

So, in our thinking, let’s make the feds a member of a household and not pretend it’s a household on its own.