Budgets Balance Themselves. Really?

Really? Budgets don’t actually write themselves, so it hard to see how balancing them does not need management.

A federal political leader recently stated that if you grow the economy, then budgets will balance themselves. What he means is that tax revenue grows as the economy grows, filling the treasury and providing enough revenue.

This happened in the 1990s…the Government made some changes, reduced transfer payments, yes, but essentially got out of the way and let the booming economy fill up the coffers. If it did anything wrong, it probably did not control spending enough, but that is hard to argue given the outcome of balanced budgets for a few years in a row. But it was only for a few years and we still had hundreds of billions of dollars of federal debt to pay.

But back to the claim…if in business we said that we could spend what we want so long as we keep growing sales, would anyone believe that? If you knew management’s philosophy was “we will grow into our spending”, would you extend them credit?

The economy is not something that is easily controlled. Government has some levers – the Bank of Canada rate, the money supply, some regulatory controls, but otherwise people are free to do what they want regardless of the wishes of the Government. So the growth is not something that you can just turn on and make happen.

The ultimate problem: politicians have short term vision to the next election, and voters want to hear that the debt problem is not really that significant.

Isn’t this all similar to what we as credit professionals hear all the time: “I need more credit in order to make the sales to provide the money I need to pay you back”? The problem isn’t the next sale, it is the pile of existing debt you can’t pay off with that one more sale.

Budgets are balanced by making sensible investments and living within our means, not by counting on growth (and when governments fail, they blame sluggish growth). Budgets and debts need to be actively managed.

Across Canada we have about one trillion dollars of combined government debt. If we paid off that debt at one dollar a second, we’d be paying for over 30,000 years. We should be more concerned.

We have been promising ourselves that we will grow ourselves out of that debt for close to 50 years now. How’s that been working so far?


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