Deficit Reduction

Deficit reduction means reducing the amount borrowed by government to finance the spending that is greater than its income. Although — according to some governments and Keynesian economists — deficits are necessary as a way of maintaining spending during periods of economic downturn without raising taxes, business people and monetarist economists condemn deficits because they increase the cost of borrowing and decrease private investment. Keynesian economics argues governments should run deficits during recessions and pay them off through increased taxation during periods of strong economic growth because government spending can limit unemployment by maintaining demand. However, business people and monetarists generally oppose deficits because they believe government spending cannot maintain demand or limit unemployment and that deficit spending undermines economic growth by forcing the government to raise taxes to cover the increasing cost of spending, leaving less money in the hands of investors. Deficit reduction became a priority for federal and provincial governments in the 1980s because they accepted the neo-conservative argument that cutting government spending would stimulate economic growth and lower unemployment. However, other economists argued that Canada’s debt-to-income ratio was acceptable, and an economic growth strategy would allow the government to maintain social spending. In the 1980s and 1990s, federal and provincial governments in Canada used deficit reduction to justify their cuts to social spending, including health services.