Time for Ottawa to plan for future

NationalPost.com – FP Comment – Time for Ottawa to plan for future: The 2010 budget must look past short-term political needs
Posted: December 15, 2009.   By Glen Hodgson

Last January’s federal budget was prepared in the midst of crisis, both economic and political, and was therefore all about crisis management. The Canadian economy had quickly fallen into recession, dragged down by the global financial crisis, and urgent action was needed to restore growth. (The politics were messy, too — but we’ll not comment on that.) 



Economic growth, albeit tepid, has returned to the Canadian economy, so a different sort of federal budget will be needed this time around. Now is the right time to begin shifting the focus of fiscal policy from crisis management to policies that will produce sustainable public finances and economic growth. The budget can’t get too far ahead of itself. It has to ensure that durable economic growth is restored in 2010, but it should also outline clear policy commitments for the longer term. 

We propose three building blocks for this budget.  First, it should confirm that the fiscal stimulus program introduced last January — at a time of crisis, recession, and fear — will be completed as planned. But it should also confirm that no more fiscal stimulus will be added. There is no common agreement on the specific criteria for when to end fiscal stimulus, but one useful measure would be sustained growth in private investment for at least six months. That won’t happen until the middle of 2010 — so keeping the fiscal stimulus plan in place for one more year would help to ensure a solid recovery in Canada in 2010, while building related consumer and business confidence.



Second, the budget should provide strong fiscal anchors for the medium term. It should re-confirm the government’s commitment to restoring fiscal balance within five years. Stabilization of the debt-to-GDP ratio within a prescribed period, such as three years, would provide an important milepost. Restoring fiscal balance remains an important policy principle if Canada is to limit total federal government debt (and the related interest payments) and create fiscal room for higher national priorities. Interest payments on federal debt still absorb $30-billion annually and will increase over the medium term, thanks to the projected deficits and expected higher interest rates. Restoring fiscal balance will also help to prepare the country for the fiscal impact of an aging population.

Third, the budget should offer a longer view on how fiscal policy can be used to boost Canada’s medium-term productivity performance. The economic crisis of the past year has distracted us from some of Canada’s fundamental longer-term challenges, including lagging productivity growth. Canada will need faster productivity growth to offset the drag effect of aging demographics, which we believe will become evident again surprisingly quickly as the recovery firms. A stronger loonie vis-à-vis the U.S. dollar should help to stimulate productivity growth as firms are forced to adapt to maintain their international competitiveness, but more strategic use of fiscal policy can add further positive incentives. 



The budget can’t do everything needed to boost productivity growth but it could outline a more comprehensive and strategic approach to tax reform, rather than provide only a series of individual tax moves. A different structure of federal taxation could boost productivity performance. Our research suggests that taxing income and investment less, and taxing consumption and carbon more, would contribute to stronger sustainable prosperity for Canada. 



A 2010 federal budget that is built around the three pillars outlined here may be a lot to ask of a minority government. The temptation will be to focus again on the “here and now” and on completing the stimulus package, with only general reference made to the need to restore fiscal stability. We would like to see more — including recognition that Canada has structural challenges just waiting to re-emerge. Now is the time to recognize those challenges and begin to define the plan for dealing with them.



Financial Post
.   Glen Hodgson is senior vice-president and chief economist, The Conference Board of Canada.Glen Hodgson

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