Social Policy in Ontario

Ottawa’s deficit-spending budget an admission that rate cuts aren’t the answer

Posted on March 22, 2016 in Debates

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TheStar.com – Business/Personal Finance – Trudeau Liberals expected pull out the stops on infrastructure investment.
Mar 21 2016.   By: Adam Mayers Personal Finance Editor

Who’d have thought that a government’s deficit-spending budget would garner such universal support?

But most business groups, usually the shrillest of critics, are behind the Liberal government’s plans. This backing includes support from the Canadian Chamber of Commerce, Canadian Manufacturers and Exporters, economists at the big banks and several think tanks. And this, even though the budget may see a $30 billion deficit when unveiled in Ottawa Tuesday.

It says a lot about how the world has changed. In the past decade, many economic assumptions have been turned upside down. Many attitudes have also changed.

Who would have once thought that our central bank would be trying to stoke inflation, rather than crush it? Or that instead of worrying about rising interest rates killing the economy, we’d be worried that falling rates killing the economy? Or that it would okay for central banks to create trillions of dollars out of thin air?

This new consensus is really a capitulation. It says that, after eight years of manipulating interest rates, that policy hasn’t worked. No amount of pushing on that string has created growth.

So it’s time to pull lever number two, fiscal policy. You spend money you don’t have (but promise to pay back). You hope to stimulate demand so that businesses will follow along and economic activity will increase.
Central banker Stephen Poloz delayed cutting Canada’s key rate again in January from its lofty one half of one per cent for this reason. He wanted to see what Ottawa planned to do.

The frantic effort to get something going is as much about the future as the present. The concern is that when the next recession arrives — which inevitably it will — there will be nothing central banks can do. There’ll be no ammunition left in the rate-cut gun.

Most economic expansions last between five and seven years. The current one is weak, but is still in its seventh year. For the U.S., it’s the fourth-longest period of growth recorded.

There’s nothing to suggest any downturn is imminent, though early in the new year many wondered. Things are looking a lot better than they did then. A low dollar has perked up manufacturing. Retail sales surprised in the latest reading. American unemployment is low.

But the “what next” worry is one reason why there’s so little criticism about Ottawa’s spending plans.

In an interview with Bloomberg News last week, Prime Minister Justin Trudeau gave an encouraging message. He said his plans are not so much “to jolt the economy into life as trying to lay the groundwork, the foundation, for better growth, better productivity, over the long term.” Trudeau has called on other Western leaders to do the same.

His government has pledged $60 billion in infrastructure funding over 10 years, with $5 billion expected Tuesday and another $5 billion next year. Trudeau has three things working in his favour:

He was elected because voters wanted change. They chose his deficit-spending promise over the Conservatives’ balanced-budget pitch.

It’s never going to get cheaper to borrow. Inflation is benign, and the cost of servicing the debt modest. Canada’s strong financial position relative to other G7 countries gives it room.

If these investments are truly in areas that improve our ability to compete, rather than in a new neighbourhood pool in a Liberal riding, business will surely follow. If companies see better road, rail, internet and telecom and education spending, they will be encouraged to make their own investments.

The one sure thing is that ever-lower interest rates have not done the job. Now that those pulling the lever admit that, it’s time to try something else.

< http://www.thestar.com/business/personal_finance/2016/03/21/ottawas-deficit-spending-budget-an-admission-that-rate-cuts-arent-the-answer-mayers.html >

Tags: budget, economy, globalization, ideology, standard of living, tax

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