Does Canada Need a Few Small Deficits ?

Chris Ragan has an excellent column – “A few small deficits may actually be just what Canada needs” – in yesterday’s Globe & Mail. [Also excellent because it illustrates most of the key policy implications discussed in Ch 12 (Spending Others’ Money: Fiscal Policy, Deficits, and National Debt) of Macroeconomics for Life !]

He tackles some of the myths and problems of government budget deficits and their impact on the national debt. One important problem, that Canada faced in the early 1990s, was continuous, large budget deficits piled up the total national debt to the point where interest payments on the debt (which must be paid yearly out of government revenues) took 36 cents of every dollar the government collected, leaving less for social programs.

Since 1996, dramatic cutbacks in federal spending have caused the national debt, measured as a percentage of GDP, to fall from 70% to about 30%. Interest payments on the national debt now take only about 11 cent of every dollar of government revenue. Canada’s debt-to-GDP ratio is now the lowest of G7 countries.

He concludes, and I agree, that “Small budget deficits now, used to finance productive and long-lasting infrastructure, can provide exactly the benefits that Canadians now need.”

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