Using deficits and debts as a yardstick of “fiscal responsibility” makes no sense. It’s time to end this practice.

Earlier this week, TVO’s The Agenda with Steve Paikin had an episode on deficits and the election. It was a great show — highly recommend everyone watch it.

For an economist, listening to public discourse on government debt is a maddening exercise. There’s two things, in particular, that are problematic:

1. Drawing parallels between household finances and government finances. They’re inherently different things. If I hear the term national credit card one more time, I will scream.
2. Using changes in general government net debt (which only include certain kinds of debt, like bond and treasury bill debt, but ignore things like unfunded pension liabilities, which is how most subnational governments get themselves into insolvency), as a barometer of fiscal responsibility.

But, you know what, I’m going to meet you guys halfway. Never say I’m not reasonable. I’ll temporarily suspend my opposition to comparing household finances to government finances to explain why we should not use changes in the size of debt as a measure of a government’s level of “fiscal responsibility”.

Let’s suppose you have three children, and you give each of them $20,000. Here’s what they do with the money:

Child 1: Spends $19,000 on Edmonton Oilers tickets, puts the remaining $1,000 in the bank.

Child 2: Uses the $20,000 as a downpayment on a rental property generating positive cashflow.

Child 3: Uses the $20,000 as a partial payment on an MBA, borrowing the remaining amount.

If you believe our media and our political discourse, Child 1 is a paragon of fiscal virtue, whereas Children 2 and 3, with their mortgage and student loan debts, are fiscally reckless.

NEEDLESS TO SAY, THIS MAKES ABSOLUTELY NO SENSE.

Of course, this is occasionally recognized in our political discourse, and you’ll get a pundit saying that deficits are “okay” if they’re being spent on physical infrastructure, but nothing else. But that still partly misses the point as well. Child 3’s debt doesn’t come from the purchase of a physical asset, but is still (likely) a good investment. Human capital is also a form of capital.

If we want to get serious about fiscal responsibility (and I believe we should), we need to do two things:

1. Do the hard work of figuring out where governments are spending well, and where they are not. Where are we getting value for money? Ironically, this will involve spending more on program audits, more on Canada’s system of think tanks (yes, this is a somewhat self-serving argument) and more on applied social science research in our universities. We also need to do the hard work up front when designing programs of thinking through what success looks like, and how we will be able to tell 5, 10, 15 years down the road if we’re getting the return-on-investment we expected.
2. We also have to recognize that, when it comes to government revenue, “a buck is not a buck”. Some taxes are more economically damaging than others, whereas others, like carbon taxes, also generate environmental (or other) benefits along with raising revenue.

We use deficits and debts as a proxy for “fiscal responsibility” because it’s easy; we simply have to look at a single number in a government budget. But if we want governments that truly deliver value, we’re going to have to do the hard work of analyzing how governments raise and spend money.