Scott Cameron and Michaël Lambert-Racine
Library of Parliament
On 7 May 2015, Canada’s federal government introduced the Federal Balanced Budget Act as part of Bill C-59, the first budget implementation bill for the 2015 budget.
Globally, balanced budget legislation grew in popularity in the 1990s and 2000s; in 2014, 28 of the 31 advanced countries in the International Monetary Fund (IMF) had such legislation. It currently exists in a number of Canada’s provinces and territories.
As the Federal Balanced Budget Act may affect budgetary policy starting in 2015–2016, it might be interesting to consider the legislation enacted by other jurisdictions, and their experiences with it.
Canada’s federal legislation
The Federal Balanced Budget Act requires a number of actions to be taken in the event of a recorded deficit, or a deficit that is forecast in a budget plan.
In either case, the Minister of Finance must appear before the House of Commons Standing Committee on Finance to explain the reasons for the deficit and to present a plan for returning to budgetary balance.
If a recession or extraordinary situation, such as a natural disaster or war, has caused the recorded or forecast deficit, the plan must impose an operating budget freeze on government entities and a pay freeze on ministers and deputy ministers.
These measures would take effect in the fiscal year following the end of the recession or extraordinary situation, and would remain in effect until a budgetary balance is restored.
If the deficit is due to other factors, the plan must impose an operating budget freeze and a 5% pay reduction on ministers and deputy ministers. These measures would take effect automatically, and would remain in effect until the budget is balanced.
Provincial and territorial legislation
Between 1991 and 1999, balanced budget legislation was introduced in eight provinces and two territories: British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, New Brunswick, Nova Scotia, Yukon and Northwest Territories.
Nova Scotia repealed its balanced budget requirements in 2009, and New Brunswick followed suit in 2015. Newfoundland and Labrador, Prince Edward Island and Nunavut have never adopted such legislation.
Balanced budget legislation at the federal level and in some provinces and territories has certain features in common, such as pay reductions for ministers in cases where balanced budget requirements are not met. However, there are notable differences.
For example, unlike the federal legislation, Alberta, Saskatchewan, Manitoba and Quebec have established stabilization funds to help them achieve budgetary balance during an economic downturn. Also, Alberta, Manitoba and Quebec do not include proceeds from the sale of Crown corporations or other assets in calculating the budgetary balance for the purpose of balanced budget requirements.
Legislation in other countries
Most advanced countries in the IMF currently require their budget to be balanced over the business cycle or with some consideration of the difference between actual economic growth and its potential.
As well, in many of these countries, strict timelines for returning to budgetary balance exist when balanced budget requirements are not met. This situation is unlike the Federal Balanced Budget Act, which allows the government to create the schedule for returning to budgetary balance.
Furthermore, most advanced countries in the IMF have a variety of fiscal requirements in addition to those related to a balanced budget. For example, they have limits on growth in government spending even during non-recessionary periods, and have legislated limits on the ratio of debt to gross domestic product.
Experiences with balanced budget legislation
In response to the 2008–2009 recession, several provinces suspended or repealed their balanced budget legislation, as they would have been unable to comply with it. In particular, British Columbia, Manitoba and Quebec suspended their legislation – in whole or in part – for a number of years. Nova Scotia repealed its balanced budget requirements.
Similarly, most of the IMF countries that had balanced budget requirements at the onset of the recession suspended, modified or repealed their requirements. In part, these actions coincided with the implementation of stimulus measures by many of these countries.
Some may view experiences during the recent recession as evidence that balanced budget legislation is ineffective in preventing deficits. However, effectiveness should perhaps be based not on the prevention of deficits, but rather on the size of the deficits that would have existed in the absence of the legislation.
Limited empirical evidence for Canada suggests that balanced budget legislation is associated with lower deficits than those that would have existed in the absence of the legislation. For example, a 2013 study by Stephen Tapp concluded that there is a positive link between balanced budget requirements and budgetary balances.
As well, a 2015 study published by the Center for Interuniversity Research and Analysis of Organizations found that balanced budget legislation that is more restrictive is associated with lower provincial ratios of net debt to gross domestic product.
A 2012 study by Wayne Simpson and Jared J. Wesley proposed different conclusions. Focusing on the experiences of Canada’s western provinces, they concluded that balanced budget requirements generally did not affect government revenue and expenditure growth.
International evidence is also inconclusive. However, preliminary evidence published following the global financial crisis – including that reported in a 2012 IMF study – suggested that balanced budget requirements are associated with better budgetary outcomes.
Cameron, Scott. Federal balanced budget legislation: Context, impact and design. Office of the Parliamentary Budget Officer, Library of Parliament, Ottawa, 23 September 2014.
Tapp, Stephen. “The Use and Effectiveness of Fiscal Rules in Canadian Provinces.” Canadian Public Policy – Analyse de politiques, Vol. 39, No. 1, 2013.
Simpson, Wayne, and Jared J. Wesley. “Effective Tool or Effectively Hollow? Balanced Budget Legislation in Western Canada.” Canadian Public Policy – Analyse de politiques, Vol. 38, No. 3, 2012.
IMF fiscal rules dataset. IMF Fiscal Affairs Department, May 2015.