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Let’s set aside for now the infrastructure spending that the Liberals plan on financing through borrowing. Borrowing to purchase a productive asset makes perfect sense — so long as it is indeed a productive asset.

The other plausible excuse for running a deficit is as a way of smoothing spending and taxes over time. An insistence on balancing the books in every year would require governments to make changes to their fiscal stance over the cycle, cutting back in bad times and expanding in good times. Instead of offsetting the cycle, government policy would become yet another source of business cycle instability. So it makes sense to ride out a temporary downturn with deficit spending.

The problem for Morneau and the Liberals is that this is not a temporary downturn, and it would be irresponsible in the extreme to make tax and spending plans for the next four years based on the assumption that the economy will suddenly roar to life five or six years from now. A lower trajectory for revenues will have to be accompanied with a combination of tax increases that were higher than what they promised, or spending restraint more severe than what was in their platform. (It’s also worth remembering that these savings were to be on top of the spending restraint that was baked into the Conservatives’ last budget.)

This timing is unfortunate for the Liberals. Abandoning a balanced budget has removed the first line of defense against the wave of interest groups that had lobbied in vain for extra funding from the former Conservative government. They are even less likely to accept with grace arguments about fiscal restraint from a Liberal government that campaigned on running a deficit.

I’m reminded of the 2014 video on the economy that the Liberals posted on YouTube in 2014 — many of its themes ended up in the Liberal platform. When he got to the question of how to square increased spending with fiscal responsibility, Prime Minister Trudeau said that “the answer is growth.” It wasn’t a particularly good answer at the time, and it’s now even less convincing.

National Post

Stephen Gordon is a professor of economics at Université Laval.