{"slice_names":["facebook_like","facebook","twitter","googleshare","linkedin","pinterest","email","comments"],"slice_params":{"facebook_like":[],"facebook":{"share_amount":"35"},"twitter":{"short_url":"http:\/\/huff.to\/1NxEbDk","tweet_text":"Why A Balanced Budget Law Could Mean More Debt For Consumers","views_amount":"0"},"googleshare":[],"linkedin":{"linkedin_amount":"3"},"pinterest":[],"email":{"emails_amount":"0","emails_title":"Why A Balanced Budget Law Could Mean More Debt For Consumers","emails_text":"The Conservatives\u2019 proposal to mandate balanced books \u201cduring normal economic times\u201d for future governments could paint the economy into a corner, potentially allowing the government to reduce its debt at the price of encouraging consumers to increase theirs.\r\n\r\nOn the eve of plans to announce the first balanced budget in eight years \u2014 and after much finagling to make it so \u2014 Finance Minister Joe Oliver confirmed last week<\/a> that the government will bring in balanced budget legislation.\r\n\r\nIn doing so, the government made good on a 2013 throne speech pledge<\/a> to invoke legislation requiring \u201cbalanced budgets during normal economic times, and concrete timelines for returning to balance in the event of an economic crisis.\u201d\r\n\r\nThe law, though potentially toothless, may require the country\u2019s central bank to adopt even easier lending policies to offset a government spending clampdown.\r\n\r\n\u201cThe balanced budget rule is basically just formalizing what the Canadian government has been doing anyway \u2014 trying to run surpluses during good times and running deficits to stabilize the economy during bad times,\u201d said Krishen Rangasamy, senior economist at National Bank. \r\n\r\nThe Harper government\u2019s announcement came the same week the IMF urged governments around the world to be more responsible with their fiscal balances in a new report<\/a>.\r\n\r\n\u201cYou need healthy public accounts that can take hard hits during severe storms. But most importantly when sunshine returns, policy makers must repair the damage to public accounts in preparation for future storms,\u201d the global monetary institution said on a conference call.\r\n\r\n\"canada\r\n\r\nLittle breathing room<\/strong>\r\n\r\nBut some economists believe it\u2019s time for the government to bring in more stimulus spending rather than austerity amid low Canadian economic growth and an unemployment rate of 6.8 per cent with little sign of near-term improvement. \r\n\r\nThe legislation will put pressure on the Bank of Canada to keep interest rates low for longer even after a recession in order to stimulate demand in the economy that might otherwise be sparked by government initiatives, Rangasamy said. \r\n\r\nBut the Bank of Canada might find itself with little room to move in an era when it has said low interest rates are likely already the new normal.\r\n\r\nIn 2008, when recession hit, the overnight lending rate was three per cent, giving the central bank ample room to maneuver. It came down quickly and has hovered at one per cent or less ever since.\r\n\r\nIntroducing the bill at a time of slow economic growth, when the interest rate is already near record lows at 0.75 per cent, could tie the hands of central banker Stephen Poloz when it comes to providing more stimulus. Some economists already believe the banker\u2019s next move will be to lower rates further and at least one believes that move could come as soon as this week\u2019s policy announcement.\r\n\r\n\u201cIt does become an issue if interest rates are already low. The central bank may not be able to provide the kind of stimulus necessary to promote a quick recovery,\u201d said Sal Guatieri, senior economist at BMO. \r\n\r\nThe central bank does have other tools at its disposal, including quantitative easing or printing money, he added, but those are more extreme and unusual measures.\r\n\r\nAfter years of consumers growing used to cheap credit, Canadian home prices are sky high while debt-to-income ratios sit at a record high of 163 per cent<\/a>.\r\n\r\nAt the end of last year, the Bank of Canada\u2019s main economic concern seemed to be household debt levels sparked by the prolonged period of low interest rates. \r\n\r\n\u201cHousehold imbalances...present a significant risk to financial stability<\/a>,\u201d it said in its last policy update of 2014. \r\n\r\nBut all of a sudden tanking oil prices overtook household debts and the bank decided to lower interest rates again in the opening months of 2015. Another reason to keep interest rates low, such as the balanced budget bill, could cause further damage to household finances, Guatieri said. \r\n\r\n\u201cIf household debt is already quite elevated, the central bank has to be cautious because the more it pushes down interest rates the more it will encourage borrowing and a buildup of debt and that in itself can pose problems with the economy.\u201d \r\n \r\nThe Parliamentary Budget Officer warned in a report last year that a balanced budget mandate should not be applied too literally<\/a>, and instead allow flexibility to consider what is in the best public interest at any given time.\r\n\r\nReining in government spending during times of slow growth could actually worsen a bad situation, while easing monetary policy allows more Canadians to add to their growing debt loads, said Lisa Philipps, professor of taxation law and fiscal policy at Osgoode Hall Law School.\r\n\r\n\u201cOnce they commit themselves to a balanced budget they inhibit themselves from doing what is economically sensible to shorten a period of economic weakness rather than worsen it,\u201d she said. \r\n\r\n\u201cMy whole understanding of countercyclical fiscal policy is government\u2019s supposed to push the opposite way from the way the private economy is going.\u201d \r\n\r\nA 'Distortive' Law<\/strong>\r\n\r\nBut in reality, Philipps believes the bill is just political optics that future governments can easily eschew. She added that many provincial governments \u2014 including B.C., Alberta, Ontario and Quebec \u2014 have instituted such legislation, and many of them have simply amended it to make exceptions when they need.\r\n\r\n\u201cThey\u2019re not really strictly enforceable in a legal sense, or they haven\u2019t proven to be so far, so really all they do is they factor into the politics,\u201d she said, adding that studies from other countries with similar legislation, such as the U.K., Australia and New Zealand, suggest the economic effect is either neutral or negative. \r\n\r\n\u201cIt\u2019s just distortive frankly to put it into law, its not something you can predict,\u201d she said, noting that the budget is just a projection based on assumptions that can turn out to be wrong and the pressure to present a balanced budget could lead to inaccurate calculations.\r\n\r\n\u201cWhen we see how fast things change \u2014 it\u2019s just crazy since 2008 \u2014 and we can\u2019t anticipate what the economy\u2019s going to do next, we\u2019re putting too much weight on holding governments to their plan.\u201d\r\n\r\nUltimately, the extent to which this legislation will impact the economy depends on the government\u2019s wording of the bill \u2014 how much flexibility they build into it and how it defines \u201cnormal economic times\u201d because, especially now, there is a lot of grey area, Guatieri said.\r\n\r\n\u201cRarely are we in normal economic times.\u201d\r\n\r\nAlso on HuffPost:<\/strong>\r\n
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