Budget Deficit — "Essential"?

So much for the "hard decisions" mentioned in the last week's Throne speech. Now we have Stephen Harper hinting that "budgetary deficits are essential", referring to the upcoming fiscal update and to the fiscal stimulus package the government is preparing. But isn't there a way to balance the books and stimulate the economy without borrowing back some of the funds that went to debt reduction just months ago?

Judging from the recent projections, all that's needed is to cut back $5.3B over two years. That's not much, compared to overall program spending which is predicted to hit $218B in 2009/10. Bring that down to $214B, cut the 2010/11 program spending from $225B to $223B - and you got two perfectly balanced budgets. That could be accomplished by merely bringing the non-essential spending back to where it used to be several years ago. Looming financial crisis is a good excuse to do just that.

But what about the economic stimulus? There's much better way to provide that than multi-billion dollar "bailouts" at taxpayer's expense:

Revive a stimulus idea that was very effectively used by the government of MacKenzie King in 1945, and continued by Louis St. Laurent through the 1950s.

As background, it's important to note that in the 1940s and 1950s, about half of Canada's money was Government-Created Money (GCM) created directly by the Bank of Canada, rather than Bank-Created Money (BCM) "rented" from the banks. Today, all Canada's money is BCM, created as interest-bearing debt. The compounding of that interest is primarily what has put Canada half a trillion dollars in the hole.

In 1945, with two million soldiers returning from overseas, Ottawa feared massive unemployment could plunge Canada into another Depression. C.D. Howe instructed the Bank of Canada to create (not borrow) money for virtually interest-free loans to provinces, municipalities, regional districts, ports and other local authorities for infrastructure projects. This economic activity created many well-paying jobs; it improved access to resources and markets; and it generated revenues for local authorities to repay the interest-free loans. When the money was repaid, it was retired from circulation (so it would not have an inflationary effect)--but the infrastructure and economic stimulus remained.

More >>>

In fact - that was actually the very same stimulus idea that got Canada out of the Great Depression. William Lyon MacKenzie King knew what he was doing when he nationalized the Bank of Canada in 1935-38; when he started using it to revive Canada's economy, to finance the country's war effort and to ensure smooth transition to peacetime economy in late 40s. Even if it wasn't the only policy which provided for a 22-year-long uninterrupted Liberal rule - that was one of the key contributors.

Right now Stephen Harper has a choice between following MacKenzie King's footsteps and risking to follow Joe Clark's footsteps. If he chooses to run a deficit, instead of reducing spending and using the Bank of Canada to provide economic stimulus - the Joe Clark / Thirty Years After scenario would become quite possible.