The Liberal Party, headed by Justin Trudeau, is under scrutiny. Trudeau originally promised in his campaign that he would run two deficits of up to $10 billion, then balance the budget for the 2019-2020 budget; however, it is now projected that Trudeau will run five consecutive deficits, starting at $29.4 billion and totalling more than $113 billion. Some pundits are criticizing Trudeau’s actions; many others are applauding him.
Although it is valid to criticize Trudeau for breaking campaign promises, it is perfectly reasonable for Trudeau to run such large deficits. Given the current economic downturn, the deficit Trudeau proposes is necessary to sufficiently conduct expansionary fiscal policy and will help to encourage economic growth. In addition, the additional spending entailed by the deficit helps to protect the livelihoods of, and increase opportunities for, those who need additional help.
First, the deficit that Trudeau proposes is key to sufficiently conducting expansionary fiscal policy. The basic logic behind expansionary fiscal policy and its benefit lies in macroeconomic theory. Any money that is spent on infrastructure, employing people, and adding benefits for Canadian citizens as entailed in Trudeau’s plan will generate more economic activity through the increased spending of newly-employed workers and recipients of government transfers. This increased spending creates demand for more products, which consequently leads to higher employment and a further increase in spending that puts more money in the pocket of consumers. This process, called the multiplier effect, increases aggregate demand, and consequently, output and economic activity. Fiscal policy is typically counter-cyclical, which means that expansionary fiscal policy should be used in times of low economic growth to help the economy get back on track.
The viability of applying this macroeconomic theory is dependent on Canada’s current economic condition. Fortunately, Canada’s economic condition both needs and facilitates expansionary fiscal policy. In terms of needing expansionary fiscal policy, the Canadian economy is suffering due to a decrease in oil prices and the resulting increase in the Canadian unemployment rate by thousands of workers. Moreover, certain groups that are benefiting from this deficit spending – such as First Nations communities – have had few substantial economic opportunities due to a historic lack of infrastructure spending. These groups particularly need the kind of economic stimulus that expansionary fiscal policy will create.
The other issue to consider is that the current state of the economy will facilitate expansionary fiscal policy. Bill Morneau, the Finance Minister of Canada, stated that “when there is slack in the economy and interest rates are low, for every dollar a government spends on infrastructure, substantially more than $1 of economic activity is generated.” Interest rates in Canada are currently at 0.5%, increasing the incentive for people to borrow from commercial banks and reducing the incentive for people to store their money in banks. That, along with the slack that has been created due to the fall in oil prices, means the substantial increase in economic activity described by the multiplier effect is likely to occur.
The economic stimulus that will be created by Trudeau’s deficit spending will help reduce unemployment and increase economic growth and productivity. As such, the Liberal Party suspects that it will be able to recoup the costs associated with the deficit by creating 100,000 jobs and increasing economic growth by 1%.
Secondarily, the budget deficit will aid disadvantaged groups. Two of the specific sources of the deficit – increased funding for recently laid-off oil workers and increased infrastructure spending for First Nations reserves – will help to increase relative equality between these groups and the rest of Canadians. It is an obligation for the Canadian government to ensure that these groups have dignified lives and deficit spending will ensure that. In particular, First Nations groups have historically been excluded from fruitful economic opportunities; increased investment in First Nations communities will help to break the cycle of poverty that exists in many First Nations communities. As a consequence of giving talented members of underfunded communities increased education and infrastructure, more individuals will be better able to contribute their talents to enterprise, increase innovation, and create a more productive economy.
Trudeau’s budget deficit comes at a time of both great need and great opportunity for the Canadian economy and Canadian citizens. In order for Trudeau to meet his promise of guaranteeing economic prosperity for Canadians from sea to sea, it is key that the Canadian government runs a deficit.
Picture taken by Dennis Jarvis on August 16, 2008, titled "DSC_7007 - Canadian Parliment Buildings", obtained through Creative Commons.