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A Diversified Strategy for Deficit Control: Combining Faster Growth with Fiscal Discipline

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Abstract

Under current projections of economic growth and fiscal policy for the next two years, the probability that the federal government will achieve its stated goal of bringing down the fiscal deficit to 3 per cent of GDP by 1996 is almost zero. Four types of changes could improve the odds that the target be achieved: 1) faster economic growth, 2) a decline in interest rates, 3) additional cuts in program spending, and 4) increases in tax rates. It is possible to develop a diversified strategy that would 1) allow the deficit target to be met by 1996, 2) achieve continued reduction of debt and deficit beyond that date, 3) permit the economy to return to full employment by 1999, and 4) preserve the gains already made against inflation. That strategy would have lower interest rates, raise the average growth rate of real GDP to 5 per cent per year over the next 5 years. A nominal freeze on program spending would be imposed in 1995 and 1996 and would be followed by moderate real growth in 1997-1999. There would be no increase in the global effective tax rate. For the largest part, the paper exposes the analytical and empirical foundations of this proposed combination of accelerated growth and fiscal discipline. Several objections are raised, analyzed and answered. Les projections économiques et budgétaires actuelles rendent pratiquement impossible la mission que s'est donnée le gouvernement fédéral de réduire son déficit budgétaire à 3 pour cent du PIB en 1996. Quatre sortes de changements pourraient améliorer les perspectives à cet égard: 1) une croissance économique plus rapide, 2) une baisse des taux d'intérêt, 3) des réductions supplémentaires de dépenses de programmes et 4) un alourdissement de la fiscalité. Il est impossible de concevoir une statégie diversifiée qui permettrait 1) d'atteindre la cible officielle pour le déficit en 1996, 2) de continuer à réduire la dette et le déficit au-delà de cette date, 3) de ramener l'économie au plein emploi en 1999 et 4) de protéger les gains déjà réalisés contre l'inflation. Selon cette stratégie, des taux d'intérêt plus bas hausseraient la croissance réelle moyenne de l'économie à 5 pour cent par année pendant 5 ans. Un gel nominal des dépenses de programmes serait imposé en 1995 et en 1996 et serait suivi de hausses réelles modérées en 1997-1999. Le fardeau fiscal global ne serait pas alourdi. L'étude présentée s'applique surtout à exposer la base analytique et empirique qui justifie cette proposition stratégique fondée sur la combinaison d'une accélération de la croissance et d'une discipline budgétaire rigoureuse. Plusieurs objections au plan sont soulevées, examinées et résolues.

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Bibliographic Info

Paper provided by CREFE, Université du Québec à Montréal in its series Cahiers de recherche CREFE / CREFE Working Papers with number 28.

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Length: 51 pages
Date of creation: Aug 1994
Date of revision:
Publication status: Published in Canadian Business Economics, 3, pages 3-26, Automn 1994
Handle: RePEc:cre:crefwp:28

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Keywords: Fiscal discipline; growth; Canada;

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Cited by:
  1. Lars Osberg, 1996. "Economic Policy Variables and Population Health," Department of Economics at Dalhousie University working papers archive healthy, Dalhousie, Department of Economics.

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