What a difference two weeks makes; our federal government has moved from calling a budget deficit in fiscal 2009-2010 “irresponsible” to “likely”. Mr. Harper and Mr. Flaherty divulged ever more pessimistic prognostications for our economic future in order to soften up the public for what is likely going to happen whether we plan for it or not: a couple of years of federal deficits. Now that the last lacey lingerie of fiscal conservatism has been tossed to the stage floor, we can undertake the legitimate debate on how large a federal deficit should be planned for and what it should be spent on.
Canada need not commit to deficits proportionate to what is being contemplated in the US because our situation is not nearly as dire. Canada went into this period of turmoil in better fiscal and economic shape than our southern competitor. Our federal government was in surplus, our unemployment rate was at 30-year lows and our banking system was the strongest in the developed world. While the US federal government may run a deficit of more than $1 trillion in 2009-2010, a proportionate figure in Canada would be $100 million, which is completely unnecessary. Even the left-leaning Canadian Centre for Policy Options is calling for a deficit of “only” $30 billion, to be spent on infrastructure projects and expanded support for individuals. Even this figure is much more than what is really required to avoid allowing a 2 or 3 calendar-quarter recession from turning into a longer period of economic decline.
The Liberals under Jean Chretien and Paul Martin paid down $80 billion in federal debt, and the Tories in their short tenure paid down another $40 billion. With the debt shrinking and the economy growing, Canada now has the lowest federal government debt in the G7. Chart 1 shows that fiscal 2008-2009 is already close to deficit; but the real story is the large surpluses that have been achieved over the past few years even with the significant tax relief and increased spending doled out by the Conservatives. Canada could certainly afford a couple of years of $10-15 billion dollar deficits in each year without jeopardizing our fiscal strength and there is no risk of crowding out private capital requirements in the debt market. Chart two from the Parliamentary Budget Office demonstrates that next year’s deficit could be between $4 and $14 billion just based on current spending projections without taking into account any additional initiatives for support programs or infrastructure spending. These are very un-scary projections from an impartial source that is responsible to all parliamentarians, not just the government. It is highly likely that the government will do much more, once the political capital for going into deficit is going to be spent in any case. The question becomes – who is going to get the money?
The Beggar’s Burlesque
The usual cast of characters is now traipsing before the federal government with hats in hand. First up was the auto industry, in parallel with their US compatriots; now the aircraft manufacturers are touting the strategic nature of their industry and how they deserve help as well. Traditional manufacturing, already having suffered massive job losses during the period of the rising dollar from 2002-2007, is threatening calamity if more fiscal regime relief and stimulus is not offered soon. The list will go on and on; and you can bet that the provinces will do their own dance before their federal masters asking for increased transfer payments under exceptional circumstances, since most provincial debts (not Alberta) are proportionately higher than their GDPs and they do not have the same borrowing capacity as the federal government. This parade is what Governor Arnold Schwarzenegger calls the kabuki, the intricate political dance of presenting one’s request, even if there is little chance of it resulting in success. All politicians recognize the right of these groups to participate in the kabuki, in the same way that kings and queens were petitioned at court in earlier times.
The most successful kabuki dancers will be the construction industry, though they may not even need to show up at all. The federal government is already talking about accelerated infrastructure spending, and that’s why John Baird was transferred into the Transport portfolio, to knock heads and free up all that money for bridges, roads and repairs that seems to be slowed by bureaucratic red tape. The problem is with the speed that all of this spending can make its way into the system – the quickest way to create economic activity is to fund a project that is already underway, because all the engineering, preparatory work and contract negotiations are far advanced. If Canada is going to have only a mild recession, then most of the money to fund new projects will only get into the system towards the end of the recession, and Canadians will have to rely on more traditional fiscal measures like transfers to individuals and tax cuts to revive the economy in the meantime. I am fearful that in the quest for speed and expediency a lot of bad projects will get funded because they can be undertaken quickly, while many longer term projects with greater potential for lasting impact will remain unfunded.
Ya dance with the lady what brung ya
We have been dancing with the United States since Canada’s founding and 20 years of free trade have made us closer still. There will be tremendous political pressure to mirror sector-specific initiatives like those for the auto industry and Canada will have no choice but to cooperate in order to avoid accusations that we are not doing our part, leading to trade disputes. However, we should resist calls from the US to deficit spend proportionately; that is, if the US is going to enact a stimulus package worth $700 billion in 2009 (the figure being discussed by incoming Obama economic advisors) then Canada should enact a $70 billion program of its own. We don’t need that much stimulus and we must not fall into that political trap. The result would ultimately be inflationary and would create lasting distortions in our economic landscape.
Ironically, the more the Americans spend, the less we will have to here. There is a significant spillover effect from US stimulus on Canadian manufacturing, tourism, entertainment and other consumer spending. If the Obama package aims to create 2.5 million new jobs across the US during the first two years of his term, then you can expect that the inter-related cross border industries that will benefit will create jobs in Canada as well. Our federal government must coordinate its initiatives with the US and be in constant dialogue with them, but does not need to spend to the same extent.
Wither crumbling Montreal?
Anyone driving through the Turcot interchange may vote for a quick injection of a few billion dollars to get its replacement underway before it falls down on us. Sadly, this project is not far enough along to make a difference over the next 18 months or so. However, our long-stalled CHU superhospitals could be accelerated, if only they could stop bickering long enough on the French side to finally pick a plan that would allow work to begin. There is lots of local opportunity to fix our bridges, re-pave our roads, build community centers and schools, tear down the Bonaventure and re-develop the Old Port, the list goes on. However, we need politicians and political pressure groups to get past the immobilisme that has hampered our progress for so long and act together to promote revitalization for Montreal. What if the federal government offers us billions and no one comes to the dance?
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