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Speech on a motion to AMO to ask the province to close the fiscal gap

By: James Jeff McLaren
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Speech on a motion to AMO asking them to ask the province to close the fiscal gap

This is a very timely motion of critical importance for all levels of government. The “closing the fiscal gap” that this motion is calling for is a concept that is right now being endorsed around the world by professional economists from all sides of the political spectrum. Many European countries have already instituted comprehensive policies to monitor and close the gap. In the US there is a petition to pass the “inform act” which has been signed by over 1200 professional economist including 17 Nobel laurites – because economists everywhere recognize that the tools used until now have been ineffective at demonstrating the problems that governments all over the world at every level have concerning fiscal gaps.

Net fiscal obligations refers not just to formal and informal commitments to future payments, but also formal and informal commitments to future levels of taxation. The difference between these is the fiscal gap. The problem come with nomenclature and the time horizon chosen – note that I say chosen because that is the heart of the problem. If we look at a time horizon for a particular expenditure or revenue that is too short we can make the gap smaller by not counting all future costs. This sleight of hand allows anyone to calculate the fiscal gap to be whatever they want. And governments around the world have been doing this since the end of WWII and probably did so because John Maynard Keynes, one of the architects of the new economic order, said “in the long run we are all dead” and this was interpreted to mean that we don’t need to think too far ahead by many.

A case in point is the selloff of Hydro 1, it will lower the fiscal gap over the next two years – that is to the next election – but it will widen the gap at longer time intervals. Where the left and the right may disagree about particular policies to lower the gap, economists from the left and the right are in consensus that lowering it is better for the public good.

The first step is to identify the problem in terms of real cold hard numbers at the infinite horizon – the tool for this is called infinite-horizon fiscal gap analysis. The infinite-horizon fiscal gap tells us whether the government has, over an infinite-horizon, enough receipts to cover its projected spending. It equals the present value of ALL projected future expenditures minus the present value of ALL projected future receipts. Let me stress the word ALL.

It puts everything on the books – regardless of nomenclature or time limits. A positive fiscal gap means the government is attempting to spend, over time, more than it can afford. Doing so violates what economists call the government’s intertemporal budget constraint. Hence, a positive fiscal gap is a direct measure of the unsustainability of current fiscal policy.

Eliminating the infinite-horizon fiscal gap is a zero-sum game across generations. Hence, the fiscal gap tells us the fiscal burden that will be imposed on today’s and tomorrow’s children if current adults don’t pay more to and/or receive less from the government.

Calculating the infinite horizon fiscal gap is relatively easy: it involves taking existing fiscal projections to infinity and then highschool algebra to find the appropriate present value. Many governments do this already. Italy since the 2008 crisis has applied this and as of last year actually achieved a tiny negative gap (this in spite of having a debt to GDP ratio over 100%) – this means that current Italians will bestow greater fiscal value on their children than the children will bestow on the current generation. The US on the other hand is has an unofficial Infinite horizon fiscal gap 16 times larger than its official debt in 2015. This means that future generations are hugely in debt to pay for current the consumption of the current generation. In other words: the current generation is receiving far more value than it pays for and Future generations will receive far less value than they pay for.

This is a timely motion; Ontario needs to identify and likely close the fiscal gap – “likely” because we don’t know for sure but it is a pretty good bet . This form of analysis can and should be done municipally too – I expect to have some conversations about this soon – this is a very important initiative that I wholeheartedly support.

Thank you.

Added on: Oct 31, 2016
By: James Jeff McLaren
© 2008 - 2018, James Jeff McLaren