Coalition must grasp deficit nettle – Opinion – Coalition must grasp deficit nettle
December 03, 2008. Thomas Walkom

For Canada’s would-be coalition government, the hard part is still to come. The three opposition parties have decided who will be prime minister should they succeed in replacing the Conservatives. They’ve indicated, in general terms, their agenda. Now they have to come up with a specific recession-fighting plan – and a federal deficit – big and bold enough to work.

The Liberals may find all of this difficult. Not all are happy with the idea of joining forces with the New Democrats and Bloc Québécois. More important, many have become congenitally allergic to the kind of government deficits that this coalition would have to run to dent the recession. The party takes particular pride in what it sees as the success of former Liberal finance minister Paul Martin in eliminating the deficits of the ’80s.

Indeed, during the last federal election campaign, the Liberals’ main fiscal criticism of Harper’s Conservatives was that they spent too much.

But here is what the Liberals – and the public – have to keep in mind.

First, government deficits aren’t always bad. At times, they are necessary – particularly if government is to take up the slack when business isn’t investing and jobless consumers aren’t buying.

Harper himself made that point at a Pacific Rim leaders forum in Peru last month and he was right. Unfortunately, he chose not to put those thoughts into action.

Second, Liberals have to revisit their own mythology. The persistent deficits of the ’80s were caused not by out-of-control government spending but by spectacularly high interest rates that hiked Ottawa’s borrowing costs.

When interest rates went down, so did deficits. The social spending cutbacks imposed by Martin (which had their own costs) were secondary.

This means as long as interest rates are low – and they are expected to stay at rock bottom – there is little risk of short-term deficits becoming permanent.

Third, to be effective against this global slump, fiscal stimulus – whether in the form of tax cuts or spending – must be both huge and co-ordinated. That’s the point that the head of the International Monetary Fund made at last month’s G20 meeting of world leaders in Washington.

The IMF is calling on countries whose finances are in relatively good shape – such as Canada – to stimulate by an amount equal to 2 per cent of their national economies

In Canada’s case that would amount to new tax cuts or spending of about $30 billion and a consequent deficit next year somewhere in the neighbourhood of $35 billion.

Fourth, any government stimulus must be geared to quick results. The coalition talks of spending money on infrastructure projects like sewers. But that takes time.

Both the IMF and the organization for Economic Co-operation and Development say world governments should focus their fiscal attention on the poor and vulnerable – for the simple reason that people lacking money are most likely to spend any new cash they get.

Indeed, if governments were rational, they would use this recession to declare an all-out war on poverty.

Given the phobia about deficits in both the public and media, it will take some courage for any government to do any of this. Last week’s economic update indicated that while he talks a good game, Harper doesn’t have the nerve to do what’s necessary. The would-be coalition must. Otherwise, what’s the point in changing governments?

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