Finance Minister Jim Flaherty
Photo Credit: CBC

Let’s get straight to the point. The deficit is an economic problem, but it is not as serious as many make it out to be. What may surprise many people is the fact that many business leaders and almost all neo-conservative politicians secretly agree. Don’t be fooled by Finance Minister Jim Flaherty’s recent rumblings about the deficit. His main concern is tax cuts and smaller government, not the deficit. In fact, a large deficit plays right into his plans for smaller government.

Let’s rewind our discussion back to the events in Ontario during the early 1990s when there was a severe recession and Mike Harris, who worked closely with Flaherty, was not quite yet Premier. Ontario was actually deficit-free for several years just before the recession of 1990. Recessions usually cause deficits, because the unemployment levels significantly reduce government revenue and because of the large costs of helping the unemployed. Based on the ideas of Keynesian macroeconomics, some governments try to end recessions by simulating growth through spending, further increasing the deficit. Ontario Premier Bob Rae, the leader of a socialist NDP government, tried this and so have most governments, including Mr. Harper’s, during this most recent global recession. Bob Rae eventually stopped spending and started reducing the deficit when he started receiving a lot of flak for the increased deficit. When Neo-conservative Mike Harris came to office, the deficit was already significantly way down. Mr. Harris and Mr. Flaherty continued the policy of deficit reduction, but not at a rate faster than Rae and that of other Canadian governments. The economy improved, not because of Harris tax cuts or deficit reduction, but because of low U.S. interest rates that created a large market for Ontario exports.

Why would a neo-conservative government not care about deficits or even want an increased deficit? Large deficits reduce the fiscal capacity of government, and therefore eventually reduce the size of government. Neo-conservatives Ronald Reagan and George W. Bush both enacted huge tax cuts during their presidencies which in turn sparked large spikes in the deficit. Following in their footsteps, Jim Flaherty and Stephen Harper cut the GST by two percent. Given that this is a very unpopular tax, any government would be foolish to reverse the decision with an increase. Yet the GST cut will deprive the government of substantial amounts of revenue over time, which will further reduce the size of government.

Old conservatives hate deficits. Neo-conservatives do not. But there is nothing liberal about neo-conservatives. Mr. Harper and Mr. Flaherty are true believers of the neo-conservative ideology and are proud followers of neo-cons like Mike Harris, Ronald Reagan, and Dick Cheney.

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Tags: deficit, Economy, jim flaherty, neo-conservative, stephen harper

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