The $64-billion question

Will the government's deficit be enough to turn the economy around?

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The Gazette, Sunday, January 25, 2009

On Nov. 27, Jim Flaherty presented an economic update that forecast a surplus and predicted balanced budgets through 2012. On Tuesday, exactly two months later, he will release a budget forecasting a $34-billion deficit in the next fiscal year, $64 billion over the next two years, and about $100 billion in deficits until 2014.

What's the explanation? Quite simply, that was then, and this is now. Back then, in another era, the finance department was still living in denial. Only five days earlier, the prime minister made an important speech acknowledging that we were, of necessity, moving into a period of deficit spending to stimulate an economic recovery. Classic Keynesian economics - pay down debt in good times, so you can spend in bad times. Evidently, the folks over at Imperial Finance didn't get the memo.

Well, this is where Canada finds itself now, in a situation, as opposed to a predicament. Over the last dozen years, since the Liberals balanced the books in 1997, Canada has paid down more than $100 billion in debt. The present government has paid off more than $40 billion. The national debt, dangerously close to 70 per cent of GDP when the Liberals took office in 1993, has been reduced to near target levels of 25 per cent. Canada has gone from to worst to first in terms of fiscal frameworks among G7 countries. It is an exceptional achievement.

And now we are drawing down on that sweat equity. The $34-billion deficit forecast for the next year is small change, relatively speaking, to the $38-billion deficit the Liberals left on leaving office in 1984, when the economy, in current dollars, was about one-third the size it is today. It's smaller than the $42 billion the Conservatives left the Liberals in 1993 when the economy was about half the size it is today.

For example, the 1984 deficit was 7.9 per cent of GDP of $481 billion and debt was 52 per cent of GDP. The 1993 deficit was about 5.2 per cent of GDP of $763 billion, and debt was 70 per cent of output. The 2009 deficit of $34 billion will be two per cent of projected output of $1.6 trillion, and the debt ratio is down to less than 30 per cent of GDP.

So the $64-billion question is what's all the fuss about? The follow up question is, why did the Harper government leak the deficit projection before the stock market closed last Thursday? You can understand wanting to get the bad news discounted by making it old news by budget day, but putting it out while the markets were still open? That's pretty stupid.

The projected deficit numbers over the next five years mean that the more than $100 billion of debt paid down by Ottawa since 1997 will go back on the books. And the federal debt will again be more than $600 billion. But by 2014, that will be only a third of the economy, not more than two-thirds as it was in 1997.

The moment we are in requires a deficit. Government revenues are down across the board - personal taxes, corporate taxes and GST revenues are all going to shrink as a result of job losses, disappearing corporate profits and reduced consumption. That's on the revenue side of the government ledger. On the spending side, there's going to be an infrastructure program.

A Nanos poll for Policy Options magazine, being released tonight, shows three Canadians in four support infrastructure spending, and half the population supports tax cuts. What Canadians don't support is industry bailouts like the $4-billion rescue package for the auto industry - only one Canadian in eight favours that.

But there is plenty of cover for what Flaherty is doing and what Barack Obama is proposing in Washington, not to mention the dire fiscal situation he inherited from George W. Bush. Consider: Washington was already running a $1.2-trillion deficit this year, and that was before Obama got to the White House. With the usual multiplier of 10, that means Canada could run a deficit of $120 billion this year, and no one would be shocked. President Obama is forecasting trillion dollar deficits for year to come.

Moreover, as part of his recovery package, Obama is proposing a $300-billion middle-class tax cut. In relative Canadian terms, Flaherty could bring in a $30-billion tax cut, and run a much higher deficit.

So the question is not whether the deficit is so big, but whether it's big enough in terms of what needs to be done.

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