EDITORIAL — The time for debt fight is now — Fiscal dividend wasted

Four years ago, the Canadian government recorded a deficit of $42 billion.

This year, it is out of the red and into the black, a feat not accomplished in 50 years. South of the border, U.S. President Bill Clinton soared in the polls when he brought down that country’s first balanced budget since the 1960s. The friendly North American neighbors now lead the G7 group of nations in fiscal performance, an achievement put to great political use by their respective political leaders.

To hear Canada’s finance minister, Paul Martin, tell the tale, the war on the deficit was won by the federal government’s prudent management and fiscal retrenchment, reinforced by the Bank of Canada’s low-inflation policy and helped by the revitalization of domestic economic activity.

While balancing the budget was no picnic, credit for this modest victory belongs to taxpayers, not politicians.

We must not forget, however, that Paul Martin and his colleagues refuse to face their real foe, the massive $583-billion federal debt, which continues to shackle taxpayers to the grindstone.

We must also remember that most of their spending cuts were achieved by cutting transfers to the provinces, making it exceedingly difficult for them to battle their own respective debts. And the huge increase in government revenues was brought about by a stronger-than-expected economy that pushed more and more wage earners into ever-higher tax brackets.

The government did take some steps to reduce the tax burden of lower-income Canadians, but, as always, the middle-to-higher-income individuals missed out on the shift towards tax relief. And it doesn’t get any better: economists predict that in the years ahead, the Liberal government will keep tax relief well below education, social programs and unemployment relief in its list of priorities.

Indeed, the ink was barely dry on the first balanced budget in five decades when legions of special-interest groups started clamoring for more stimulative spending. Most wanted the government to allocate the “fiscal dividend” from the deficit-elimination effort to a variety of social and economic programs.

Many economists argue that such debates are premature because the debt monster’ has not yet been vanquished. It has not gone unnoticed that the government budgeted no specific debt repayments for the remaining few years of this century.

Economists warn that this omission may haunt us in the years to come, because favorable economic circumstances may not last much longer. A more rapid reduction in the debt burden today would afford the government more room to shift spending on interest payments to more productive uses tomorrow. But debt reduction demands a level of discipline few politicians are able to muster, especially when times are good and elections are looming. Simply put, rapid debt reduction does not enjoy the same degree of political support as deficit elimination.

By targeting balanced budgets over the next few years rather than moving to modest surpluses, Paul Martin has put debt repayment on the back burner. Debt reduction, therefore, will have to come solely from any unused contingency reserve which, in turn, will only be available if the economy remains buoyant.

Many economists doubt that the current economic expansion will continue unabated for years to come. They believe that the only way to reduce the vulnerability of federal finances to unfavorable economic circumstances is to permanently lower debt-service costs by paying down debt. Good times never last forever.