Canada could use a fiscal cliff

Budget Armageddon isn’t such a bad way to force politicians to make necessary compromises.


(Photo: Hellodavey1902/Wikimedia Commons)

What’s at the edge of a mountain of debt? A fiscal cliff, of course.

Nothing in the geography of budgets stirs emotions like the prospect of the U.S. economy racing off the fiscal cliff this coming January. Big name CEOs like Lloyd Blankfein of Goldman Sachs and Jamie Dimon of JPMorgan Chase are pleading with Congress to change course. (They’ve even offered to pay more income tax!) The U.S. military warns of a “devastating effect” on it and every other government department. Numerous bank economists predict a tumble off the fiscal cliff could send a fragile U.S. economy straight back to recession.

Sounds bad, all right. But that doesn’t mean there isn’t a lot to like about the cliff. We might even want to try something similar in Canada.

The cliff is a combination of expiring tax breaks and automatic spending cuts that could remove up to $720 billion of government stimulus from the U.S. economy starting in January, all of which has prompted various doomsday scenarios.

The spending cuts are the most fascinating aspect of the process. As quid pro quo for lifting the U.S. government’s debt ceiling last year, Republicans in Congress demanded $1.2 trillion worth of budget cuts over the next decade to drag Washington back into solvency. If there’s no bipartisan agreement on how to do this by the new year, a series of automatic spending reductions will kick in, equally split between social programs and the military, the idea being that cutting social spending pains Democrats while Republicans are repelled by the thought of steep defence reductions.

The cliff is a classic game-theory attempt to force a bunch of uncooperative players toward a co-operative outcome using an arbitrary deadline and scary threats. The prospect of getting hanged in the morning tends to focus the mind, after all.

More important, the cliff is an obvious effort at correcting the biggest flaw in public budgeting—the tendency of politicians to ignore the broader, long-term implications of what they do by continually kicking problems down the road. Every expenditure, whether martial or social, can always be defended as worthy in isolation, while the debt and deficit grow like Topsy off-stage. Put a cliff in place, however, and all of a sudden actions have palpable consequences.

The cliff ties political efforts to immediate results in a pressing and unavoidable way. As such, it seems like a brilliant addition to the business of governing. Can’t find a way to solve the budget mess co-operatively? Then you’ll soon find all your pet projects getting the axe indiscriminately. Manufactured deadlines and disasters may seem overly dramatic, but it has finally brought a sense of urgency to Washington’s fiscal problems.

The notion of a self-inflicted political pain machine isn’t new. Mutually unpleasant cuts to military and social spending were a key feature of the 1985 Gramm-Rudman-Hollings budget deal during the Reagan years, although the success of these measures remains controversial. While Congress generally found a way around the most unpleasant aspects of 1980s-era cliffs, their presence imposed a parsimonious mood on Washington that eventually resulted in the balanced budgets of the Clinton years. There’s every reason to expect the same thing will happen this time around. (And if not, then the deficit gets cut in half instantly.)

All of which brings up the question of how could we import the cliff concept north.

While Canada’s parliamentary structure avoids the deliberate fractiousness of American politics, we still have plenty of issues that have devolved into non-co-operative games—at both the federal and provincial levels. The endless debates over reforming equalization. The dream of a national security regulator. The Northern Gateway pipeline. Slap a deadline on the issue, promise a pox on everyone’s house if they don’t reach an agreement, and watch a bunch of self-interested politicians suddenly find a way to co-operate. Cliffs can do wonders for the political landscape.

Peter Shawn Taylor is a writer specializing in economic issues