Real concerns about government debt and deficits are bringing politicians to a moment of truth. Whether you are a recently elected member of Congress or a finance minister in Canada or in a Canadian province about to deliver the next budget, you know the exercise will be painful and the road arduous. Earlier this month I attended Governor Andrew Cuomo’s State of the State Address and it was clear that the efforts to reduce the budget deficit will require a sustained commitment over a number of years. This message is being repeated across the land and we can expect President Obama to present essentially the same approach at the State of the Union Address next week.
Despite the well deserved praise by observers of Canada’s performance in the Great Recession, Canadian political leaders are facing similar obligations. After over a decade of balanced and surplus budgets allowing for the reduction of the public debt, governments at both the federal and provincial levels are facing significant deficits. While the ratio of debt to GDP is more favourable in Canada than in the U.S., the problem remains the same—an increasing gap between lower revenue coming in and increased spending in entitlement programs.
Remedies in both jurisdictions vary from a call to reductions in spending to increasing revenues without affecting economic activity. With economic recovery modest in both Canada and the U.S., political leaders are reluctant to stifle demand from consumers by raising taxes and seem to be turning increasingly their attention to cutting spending. In the U.S., a presidential commission headed by Democrat Erskine Bowles and Republican Alan Simpson has proposed a combination of massive cuts and a need for tax reform. In Canada, social programs are coming under greater scrutiny. The caveat is the risk to confuse cutting waste, eliminating inefficient or outmoded programs, or reforming existing programs with stopping investment in future and necessary infrastructures projects needed for a competitive economy in the future. Countries like China and Brazil are investing massively in building roads, high speed rail, energy related projects. China itself spent 9 percent of GDP in infrastructure building in 2009. The temptation to balance the books can lead to a failure to invest in necessary public goods and it represents the biggest danger to our long term prosperity.
Investing in high speed rail in the U.S., building our energy potential in Canada, rebuilding roads, improving airports, revamping seaports, and building transmission lines should be considered as vital to future generations. It is my belief that it is possible to rein in government spending, invest in public goods and build for a more prosperous future. History is on our side.
Consider our case in Québec. After close to a decade of balanced budgets, the Québec budget was back in deficit territory by 2007-2008. What has the Québec government chosen to do? It decided to invest in rebuilding the infrastructure networks as it anticipated the economic slowdown in 2007. It then produced a five-year plan to return to a balanced budget while continuing to invest massively in developing hydroelectric power plants in northern Québec. In the coming months, it will announce the North Plan aimed at developing 72 percent of its land mass (nearly twice the size of Texas!), north of the 49° with investments in mining, energy and sustainable tourism. The approximate cost of the project over the next 25 years will be $50 billion.
Currently, Québec’s economy is among the most performing in North America with an unemployment rate two percentage points below the U.S. and for the first time in decades it is lower than the Canadian national average and the neighbouring province of Ontario. Granted, Québec is not unique in this approach, but the fiscal hawks would have advised otherwise. Québec’s economic outlook remains promising, but more important, Québec continues to invest in its economic infrastructure in the firm belief that prosperity for future generations is best achieved by finding the balance between fiscal management and creating wealth.
Creating wealth provides economic development and stimulus for economic activity. Both Canada and the U.S. have acted in that direction following other difficult economic slowdowns. This will be the challenge facing decision makers in the 2011-2012 budget cycle.
