A backward-looking budget that looks supremely political

TheStar.com – Opinion – A backward-looking budget that looks supremely political: Harper misses target on fiscal stimulus, tax cuts, infrastructure and employment insurance
Jan 28, 2009.
For Stephen Harper, the only thing that matters about the 2009 budget is that it meets the political imperatives he imposed on himself with his disastrous November fudgit-budget.
On that front, Harper and all Canadians are in the hands of Liberal Leader Michael Ignatieff.

But for Canadians, the only thing that really matters is how effective the budget will be as a response to the biggest economic crisis to hit this country in more than 75 years.

The budget’s potential effectiveness depends on the answers to three key questions:

Is the fiscal stimulus it offers big enough?

Does it put the additional funding in the right places?

How does it position Canada to participate in the inevitably changed economy that will emerge as the economic downturn reverses itself?

Unfortunately, the answers to these three key questions are: no, no and no.

Let’s look at them one at a time.

First, is the stimulus large enough? The fiscal stimulus provided by the budget is in the realm of $35 billion. But provincial and local governments will have to cough up billions more as a condition of receiving the federal money.

That means the budget’s actual stimulus amounts to about 1.3 per cent of our GDP – clearly in the bottom ranks among major industrial nations’ response to the recession, and barely two-thirds of the 2 per cent advocated by the International Monetary Fund as an appropriate fiscal response. It is far less than the major initiatives announced by some governments.

In the short term, that may not matter that much. After all, our economy is so integrated with that of the United States, much (but not all) of our nation’s fate is tied to the actions of the new Obama administration.

It will mean that our economy will take longer to recover and Canadians will go through tougher times than was necessary.

It also means that other countries will come out of the recession having made substantially larger investments in their economic future.

Because budget 2009 misses the stimulus target, it turns Canada into a fiscal free rider, surfing the waves created by other nations that took the global economic crisis far more seriously. Not the image any country wants as the world emerges from a slowdown.

Second, is the money going to the right places? Part of it certainly isn’t. Practically everyone – from across the political spectrum – has stressed that broad-based tax cuts don’t make sense.

Econometric models uniformly show that the stimulus provided by tax cuts is swamped by the stimulus provided by infrastructure spending. To make matters worse, they reduce fiscal capacity permanently, thereby making it even more difficult to pull Canada out of deficit in the future. Despite that, fully $4.3 billion of the stimulus package is in the form of broad-based tax cuts.

The biggest single failure of the budget is in employment insurance. It was one of the many bases that was touched, but the impact will be trivial. The total value of EI improvements announced comes to $950 million – an increase of only 6 per cent to address the most significant recession since the 1930s. The measures announced do nothing to address the fundamental problems in EI that have emerged over the past few years – problems that threaten untold hardship as job losses accelerate.

The government has also ignored calls for a broad-based effort to encourage employers in the manufacturing and resource industries to “keep the lights on” to ride out the recession. One of the key lessons from past economic cycles is that workers don’t get recalled to work in operations that have shut down. The Harper government doesn’t seem to have taken that lesson to heart.

Nor has it acted on the pleas for emergency support from hundreds of community-based non-profit and charitable organizations, whose work is so critical to the efforts of Canadians to get through the recession. Their traditional sources of support – individual donations and grants from foundations – have been hit hard both by the general economic slowdown and by the meltdown in the financial market.

The government has announced significant investments in infrastructure. But even here, the fine print threatens to turn those investments into nothing more than repeatable news releases. Ignoring the financial realities facing provincial and local governments, the federal government has yet again refused to put up “first dollar” funding for infrastructure, making it dependent on cash-strapped provinces and local governments for its delivery. The plan is also spectacularly unfocused. There is no theme. There is no overarching objective. The infrastructure program is at the same time everything and nothing.

Third, how does it position us for the future? It doesn’t. It is scattered. It is backward looking. And it is supremely political.

Contrast Canada’s budget with the massive, tightly focused and forward-looking measures rolling out daily from the Obama administration.

It is brutally obvious that the Harper government has been dragged by political imperative into a set of budgetary policies that it considers to be ideologically unpalatable – a necessary evil to be pursued for its political value alone, implemented in half measures and abandoned as quickly as possible.

It is also becoming obvious that what’s good for Stephen Harper politically is not necessarily in the best interests of the Canadians he is supposed to be serving.

Hugh Mackenzie is an economist and research associate at the Canadian Centre for Policy Alternatives.

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