Deficit Financing and Inflation: A Reply to the Crozier Report and the Department of Finance

Abstract

Earlier this year, the Conference Board in Canada published a report by its Senior Economist, Robert B. Crozier, entitled Deficit Financing and Inflation: Facts and Fictions (Crozier 1976a). On the basis of the analysis presented in his report, Crozier concludes that Canada's recent experience with inflation has not been associated with heavy deficit financing. Even on a longer term basis, Crozier maintains that 'The government sector's contribution to inflation in Canada has clearly not been through the mechanism of deficit financing.' The report maintains that 'It (inflation) has been associated with rapid increases in total government revenues as a share of Gross National Product, and a string of surpluses in the government sector account.' In essence, the Conference Board report can be summed up in the single proposition that 'Public attitudes which link rising prices to government deficit financing can draw little support from the experience of the past. No one should anticipate the conclusion that, because prices are rising, the reason is likely to be found in the deficit financing activities of governments.' The 'Crozier Report' of the Conference Board in Canada warrants careful consideration, since it received very wide-spread circulation, and it appears that it was seized on by Canada's Finance Minister, the Honourable Donald S. Macdonald, as justification for the federal government's fiscal and monetary policies over the past five years. In a speech to the Investment Dealers Association of Canada in Jasper, Alberta, on June 19, 1976, Macdonald suggested that a major cause of inflation in Canada has not been either singly or in combination, excessive government spending, excessive government deficits and/or excessive increases in the money supply (Macdonald, 1976). As 'evidence' of his proposition, Macdonald referred to the Crozier Report findings that 'over a period from 1964-1974 the federal government had a net surplus on a national accounts basis of $2.4 billion, rather than a deficit.' He went on to argue that both the significant increase in the money supply in recent years, as well as the rapid growth in government expenditures, should