Reading the pre-budget tea leaves

TheStar.com – Insight
Published On Sat Feb 20 2010.  Thomas Walkom, National Affairs Columnist

For those consumed with the big issues of debt and deficits, the politics of this recession must seem baffling.

The Conservatives, who used to make fiscal responsibility their watchword, now say that Canada’s $56-billion federal deficit is small beer.

Prime Minister Stephen Harper says that once economy starts cooking again, the shortfall between government revenues and expenditures will virtually disappear on its own.

The traditionally squishy Liberals insist otherwise. They accuse the Conservatives of scandalous overspending and argue that the deficit really is a problem.

But at the same time, Liberal leader Michael Ignatieff wants to spend billions more on a national child care plan – all without raising taxes.

Sometimes the Conservatives say the economy can get by without more government help – as Finance Minister Jim Flaherty did in November when he noted that “our focus will not be on new initiatives or added stimulus.”

Sometimes they say the economy is so weak that government action remains an absolute necessity – as Flaherty did earlier this month when he said, “We need to continue with our economic stimulus.”

The Liberals are not much clearer.

In November, Liberal finance critic John McCallum said his party isn’t calling for an increase in government stimulus spending to deal with high unemployment.

Two weeks later, Ignatieff said the government should stimulate the economy to create more jobs for the young.

Part of the confusion is deliberate. In a minority parliament, no political party wants to suggest that it might raise taxes or cut spending.

At the same time, no politician wants to be portrayed as anything but frugal with public money.

But another part stems from the fact that even the experts aren’t sure what to do next.

Should Ottawa focus on trimming its deficits now that the worst of the economic crisis has passed?

Or should it keep spending to make sure that the so-called economic recovery won’t collapse?

The advice from global organizations such as the International Monetary Fund isn’t particularly helpful. Essentially, they argue that governments should be very worried about ballooning deficits but not make the kind of cuts that might stall recovery.

In terms that make any sense, Canada’s deficit is not large. True, it is $56 billion. But that represents less than 4 per cent of everything the country produces in a year.

Deficits were far more serious in the ’80s and ’90s – and even those weren’t particularly dangerous.

Today, debate over the deficit has shifted from its size to its composition. Parliamentary budget officer Kevin Page estimates that a good chunk of the shortfall is structural – that is, that it will remain even after the economy improves. The federal finance department disagrees.

But the truth is that no one knows. Page’s gloomy assessment is based on the assumption that relatively fewer Canadians will want to work as the baby boom ages and that productivity – output per employee – will grow at its historical rate.

But there is no guarantee that either condition will hold. Baby boomers may continue to work after they turn 65; productivity may surge ahead.

So in that sense, Harper’s insouciance is justified. In economic terms, Canada’s fiscal shortfall is not a big deal. As long as interest rates, and thus borrowing costs, remain low, it won’t quickly become one.

The second and related question has to do with stimulus, otherwise known as government spending.

Harper was pilloried by some in his own party last year for spending money to alleviate the effects of recession. But he was right. The so-called Keynesian strategy of using government money to boost a sagging economy worked.

In a logical world, this strategy would be extended. With Canada’s official unemployment rate still hovering at more than 8 per cent and given (as Harper has conceded) that the deficit is manageable, it makes no sense to wind down job-boosting programs. It would make more sense to introduce new ones.

Economist Arthur Donner and former Liberal cabinet minister Doug Peters argue that the government should temporarily eliminate payroll taxes for newly hired workers in an effort to encourage employers to use more labour. Andrew Jackson, chief economist of the Canadian Labour Congress, wants more long-term public investment.

These are just two ideas. There are others. Any would be useful. Unemployment is a scourge that can cripple an entire generation. Studies show that young people who enter the labour force when the jobless rate is high never catch up. By the time the economy improves they are the squeezed generation – too inexperienced for well-paid positions, too old for entry jobs.

STILL, Don’t expect any serious measures from Ottawa to deal with this problem. The Liberals are confused. The Conservative government is touting Flaherty’s March 4 budget as its blueprint for recovery. But it would be quite a surprise if that blueprint included a real employment strategy. The Harperites are reluctant and very temporary converts to the Keynesian notion that government should create jobs.

At the same time, it is also unlikely that Flaherty will contradict the international consensus and introduce massive spending cuts

Indeed, at the broadest level of the economy, this much-anticipated budget (Harper said he had to suspend Parliament in order to prepare it) will probably provide little dramatic news.

Yet that doesn’t necessarily mean it will be trivial.

Up to now, the Harper Conservatives have managed to confound friends and critics alike. They are not fiscal tightwads. In fact, they’ve significantly boosted government spending. But they have directed this new spending towards Conservative goals, primarily the military.

So far, they haven’t taken an axe to the country’s social programs. But they have made it clear, sometimes with relatively small but significant gestures, where their priorities lie.

They do not like the concept of paying men and women equally for work of equal value. So they cut back pay programs designed to achieve this.

They do not approve of groups who mount constitutional challenges against government. So they axed a program that handed out money for such things.

They do not like organizations that are even remotely critical of Israel. So they cut their funding. They do not like writers with whom they disagree. They cut their funds too

They think the people of Haiti deserve Canadian aid to overcome their suffering. They think the people of Gaza do not.

Few of these cutbacks or reallocations affect the overall economy. They are not big enough. But they do make a political point about who the Harper Conservatives are, what they stand for and what kind of country they want.

The overall thrust of Conservative economic policy may be confusing. The details are not. And with Stephen Harper it is in the details that the devil always resides.

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