Thursday, January 14, 2016

It's All About How The Money Is Spent


Oil dipped below $30 a barrel yesterday. And the loonie is headed south of 70 cents. But, Alan Freeman writes, it's not the Apocalypse:

If the federal government is forced to run deficits in the range of $20 billion (rather than the promised $10 billion) over the next few years, those deficits will be manageable — and nobody outside the Tory caucus and a few right-wing op-ed pages will complain. As Flaherty discovered in 2009, Canadians don’t care much about the size of the federal deficit when they feel their jobs and personal finances are at risk.

As for the new government’s rookie budget, Morneau — and Canadians — should try not to panic. This isn’t 2008, when we were facing the very real threat of the global financial system collapsing entirely. This is just an old-fashioned economic downturn — even if it will be quite painful for some in the short term.

Stephen Harper inherited the best debt to GDP ratio among the G7 countries. Canada still boasts the lowest debt to GDP ratio among the seven countries. The markets will not go crazy if Canada runs deficits for awhile.

The problem is how that deficit money should be spent:

 Infrastructure spending is a great idea — but unless the federal government throws money at poorly conceived make-work projects (the sort of thing I like to call “paving the snow”) it can’t possibly get $5 billion out the door in time for the summer 2016 construction season. Short-term spending — money for summer student jobs or speeding up construction projects already underway — might be a smarter form of instant stimulus. The new infrastructure program can wait a year.

One thing that could help would be for the Trudeau government to stop Conservative-mandated government austerity in its tracks — by reversing the mindless cuts to veterans services and First Nations. The government also should halt the Harper-era practice of budgeting billions of dollars in spending and purposely allowing much of the money to lapse, unspent, before returning it to the treasury.

The federal government’s lapsed spending hit $8.7 billion in 2014-15 — an underhanded way of cutting the budgets for Veterans Affairs, International Development and National Defence, for example. Reinstating that money would allow it to flow quickly into the economy.

Spending money isn't the problem. It's all about how the money should be spent.


Anonymous said...

"This is just an old-fashioned economic downturn — even if it will be quite painful for some in the short term."

No, I don't think so. Canada used to have a mixed economy, where a drop in the value of our dollar helped manufacturers export, while an increase in its value helped profits in the resource sector. However, manufacturers have relocated to places with third-world wages and employment standards, like Mexico and China, and there are fewer Canadian manufacturing plants left to increase orders based on the low dollar. In theory, cheap oil prices should fuel economic expansion, and it says a lot about the off-shoring of our manufacturing and the attendant gutting of the middle class that it doesn’t.

Owen Gray said...

I agree that a lot of manufacturing jobs have left, Anon. But, if we're competitive, off shore jobs can come to us to get access to the American market. Toyota is now the largest auto maker in Canada.

It's all about making wise decisions -- and not believing that the market will eventually sort things out.

Anonymous said...

I agree Owen that the tariffs on vehicles imported from outside NAFTA have been a significant incentive to locate manufacturing here. With the TPP set to phase out those tariffs, we'll see how long that continues to hold. The US is far and away the biggest market for imported vehicles. If the US ratifies TPP, Japanese manufacturers will be free to import directly from Japan - which is why the Detroit 3 opposed the trade deal. Whether Canada ratifies or not won't make much of a difference.

Owen Gray said...

I agree that the TPP is enormously problematic, Anon. It may mean the death of the Canadian auto sector -- which is why UNIFOR opposes it so vehemently. We'll have to see how things shake out.

The Mound of Sound said...

In a recent interview with Chris Hedges, John Ralston Saul described Canada and the developed world as being in the midst of an interregnum between the failure of globalization and the emergence of our next economic model. His thoughtful explanation (too lengthy for a blog comment) is convincing. It certainly is consistent with the economic dislocation across so much of the OECD.

If he's right, we could be wallowing in the doldrums until we accept the imperative of abandoning globalization and the economy-destroying, over-extended free trade lines which led North America to turn its back on manufacturing, gutted the middle class and transformed Canada into a nation whose economy and currency were subject to the vagaries of turbulent hydrocarbon markets.

Yes, the economy will rebound - eventually - but that doesn't mean it will recover fully, anytime soon, or in a stable,lasting way. If anything, a recovery that deepened our dependence on energy exports could ensure we never genuinely recover.

Owen Gray said...

When Ralston Saul wrote "The End of Globalization" a few years ago, Mound, lots of folks thought he had misread the signs. Turns out time has proved him right.

Hugh said...

They want to add more debt in order to stimulate the GDP, so the debt/GDP ratio remains the same. This obviously won't work in the long term. Like pushing on a string.

Owen Gray said...

As a long term strategy it won't work, Hugh. But, in the short term, it's like priming a pump to get the water flowing from a well.

Hugh said...

More debt, please. At some point you can't pay the interest:

Owen Gray said...

True, Hugh. But interest rates are at historic lows -- and they will be for awhile. If we have to invest, now's the time to do it.

Anonymous said...

It's also how you raise revenue. The Liberals, like the Conservatives, refuse to even slightly increase taxes on profitable corporations and wealthy individuals, and they can't stand the thought of cracking down on rich tax cheats who hide their fortunes offshore. They won't do anything to financially hurt their own privileged families and friends. They would rather sell off public assets and cut social programs.

Owen Gray said...

I agree that it's also about how you raise revenue, Anon. As I suggested in an earlier post, it's also about Tax Fairness.