The Recession & Balanced Budgets: BBLs under the microscope

By Jared Wesley on Jan 16, 2009

The current economic downturn offers a unique environment in which to test the strengths and weaknesses of Canada's various "Balanced Budget Legislation" (BBL) regimes.

A quick glance reveals that BBL's exist in at least seven (7) Canadian provinces: BC, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, and Nova Scotia.  Most of these were passed in the mid-1990s and amended in the first few years of the 21st century.  (To the best of my knowledge, New Brunswick, PEI and Newfoundland and Labrador do not have any current BBL in place.  I welcome input from readers on this point.)  The specific terms of these laws differ from jurisdiction to jurisdiction, but all commit their respective governments to meet certain requirements before posting a budget deficit. 

This does not mean that governments cannot run deficits; they can only run them under certain conditions.  In Ontario, Manitoba, and Saskatchewan, deficits are permitted in times of natural disaster, war, or drastic economic deterioriation (5% decline in government revenue, not attributable to tax relief policies).  In addition to "disaster" conditions and economic crises, NOva Scotia permits deficit spending should debt servicing costs exceed expectations; and Quebec, if the federal government reduces its transfer payments to the province.  The Alberta government may run a deficit, should the Lieutenant Governor declare an emergency.

Some governments (Manitoba and Saskatchewan) are permitted to dip into fiscal stabilization (rainy day funds) as necessary, while restrictions are placed on the Alberta government's ability to do so.  Manitoba, Quebec, and Nova Scotia are permitted to recover their deficits in the following fiscal year. 

Some see this, in itself, as a flaw in BBLs.  These critics argue that balanced budget legislation does not go far enough, and that governments should be subject to more stringent tax and expenditure limitations (TEL's) to curb spending growth.  Some go so far as to advocate entrenching these restrictions in provincial constitutions. 

According to other critics, BBL's prevent governments from acting effectively in times of economic crisis.  They do so by forcing governments to take extraordinary measures to increase spending as a means of countering a recession and promoting social justice.  In order to pursue drastic stimulus programs, for example, BBL's in some provinces require the government to....

  • balance any revenue loss or increased spending with corresponding cuts to services;
  • hold a referendum on any tax increases (Ontario, Manitoba); or
  • meet certain requirements before drawing from rainy day reserves (AB)

According to proponents, BBL's prevent governments from acting "irresponsibly," by forcing them to:

  • be trasparent about the budgetting process;
  • exhaust all alternatives (including spending cuts, privatization, etc.);
  • consult their electorates; and/or
  • impose cuts to Cabinet Ministers' salaries (BC, Saskatchewan, Manitoba and Ontario)

before posting a deficit.  This, they argue, adds an element of accountability to the budgetting process.

The current global economic downturn will offer an interesting test of these BBL's.  Will governments choose to adhere to their guidelines -- going to the people before implementing tax or fee hikes, or taking ministerial salary cuts as pennance?  Or will they amend, circumvent, or break their laws in response to extraordinary circumstances?  It will be an excellent opportunity for students to witness the trade-offs between democratic principles like accountability, transparency, fiscal responsibility, government authority, and social justice.

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