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As a result, Morneau has opened the deficit floodgates, unperturbed by the prospect of the deficit’s lunar trajectory despite a growing economy and no prospect of balancing the books by the end of the government’s mandate.

What sort of benefit can the Canadian economy expect from these deficits? Very little, according to plenty of studies on the fiscal multiplier published by the NBER. The research demonstrates no net stimulus from fiscal policy in an economy with a floating exchange rate, like Canada’s, because it is offset by tighter monetary policy. The loonie’s recent rally above US77 cents is a good example. The surge was not all due to higher oil prices; it also reflected investors anticipating that the Bank of Canada’s infatuation with lower (or even negative) interest rates is over. The loonie’s upturn began almost to the day in January the Bank of Canada announced it would not cut interest rates.

While growth in Canada will benefit little from sharply higher deficits, the added debt will burden future governments and taxpayers. We have reduced the distortions of extreme monetary policy (such as a falling exchange rate and changed incentives for saving and borrowing) by increasing the distortions from extreme fiscal policy. Such is progress in today’s world of macroeconomics.

The appointment of a novice MP like Morneau–the first rookie at Finance since 1919–was a curious move. Usually, becoming minister of finance is the culmination of years of seasoning and learning how government works. It now looks like Morneau was picked precisely because he would have difficulty saying no to his high-spending cabinet colleagues.

An artful government could have boosted the economy without spending its own money. Private sector firms are waiting for the green light to build pipelines to both coasts, boosting infrastructure spending and permanently lowering the price discount for our oil exports which are trapped in the over-supplied U.S. market. Over the last decade, Canada has invested nearly $1 trillion in developing its energy assets. We need continued investments to maximize the return on these investments, not strand them with utopian plans for greening the economy.

Canada’s unfortunate experience with hitting the “debt wall” in the mid-1990s showed that deficits don’t fix themselves. Government in Canada subsequently developed an aversion to debt that served us well during the debt-fuelled financial crisis enveloping the U.S. and much of Europe in 2008. However, despite these vivid reminders of the dangers of debt, we are now plunging head first into the treacherous waters of large deficits in a growing economy.

http://business.financialpost.com/fp...seem-to-say-no