Heeding the Times from Harry Antonides' Desk

The Spectre of Rising Deficits

April 1, 1984 -

Signals about the Canadian economy are mixed. While the latest figures on trade show that we exported a record $2.1-billion more than we imported in January, there is much uneasiness about the weak Canadian dollar and an inflation rate that rose from 5.3% to 5.5% in February.

Interest rates have been creeping up, and economists are concerned about pressure from the persistently high federal deficit. Controversy continues over the need to keep the lid on interest rates as opposed to keeping the Canadian dollar from slipping any further from the current 78-cent (U.S.) mark. Gerald Bouey, Governor of the Bank of Canada, does not want higher interest rates nor does he wish to see the dollar depreciate. But Bouey believes that the depreciation of the dollar would be worse, since that would be a sure path to inflation and eventually to even higher interest rates.

Washington's huge budget deficit—a projected $180-billion (U.S.)—threatens to undo economic gains of the past year both in the U.S. and Canada. It is certain that if we do not bring deficits under control, it will be impossible to resolve the other major pressure points of the economy, including the problems of unemployment and inflation.

In a recent speech, Richard M. Thompson, Chairman and Chief Executive Officer of the Toronto Dominion Bank, stated that although it seemed that the "storms" of the recession were behind us, the economic horizon was not yet clear. Rather, the budgetary deficit is a cloud that is "looming larger and getting darker all the time." Thompson pointed out that as interest payments become larger, more cuts must be made in other programs to reduce deficits. Without steps to control deficits, he warned, "A point may be reached where lenders lose all confidence in the ability of governments to manage their finances. Taxpayers may rebel at the notion of paying ever-higher taxes just to repay the debts of an earlier generation. In either case, the threat that money will be printed to inflate the deficits away becomes very real . . ." (Globe and Mail, January 23, 1984).

A similar note was struck in the semi-annual economic outlook published by the Organization for Economic Cooperation and Development (OECD). The OECD expressed doubts about the staying power of the recovery in the United States and Europe. A major point of concern is whether the United States will be able to reduce its fiscal and external deficits. Kjell Andersen, acting head of the OECD's Economics and Statistics Department, said: "The prospect of large U.S. budget deficits for the rest of the decade if no fiscal action is taken, combined with restrained growth of monetary aggregates, creates uncertainty about the sustainability of the recovery beyond the medium term. The longer the imbalances persist and the larger they become the greater the potential disruptions associated with their eventual unwinding."

This article originally appeared in Comment magazine, a journal founded by Harry Antonides. Find all of Harry’s pieces, and thousands more, at http://www.cardus.ca/comment