Flaherty delivers a Liberal budget in Conservative clothing

Except for the tax cuts, there's no way Ignatieff can't support this budget

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The Gazette, Wednesday, January 28, 2009

Jim Flaherty's budget does a very good job of capturing the urgency of the economic moment we are in now. The only question is whether all the money he is throwing at the problem will have the desired stimulative effect and lead the economy out of recession this year.

There's a lot more riding on this than the fate of the Harper government. The economic well- being of the Canadian people depends on Ottawa getting this right. And even then, there's only so much a small G7 country can do to contribute to a recovery from a global financial meltdown and recession.

The situation is well described in Flaherty's Economic Action Plan: "The global economy is in the most synchronized recession in the post-war period and the ongoing financial market crisis is the worst since the 1930s."

So, the worst worldwide recession since the end of the Second World War, and the worst financial crisis since the stock market crash of 1929 triggered the Great Depression of the 1930s.

If nothing else, this should provide us with a better appreciation of what our parents and grandparents lived through, and how it marked their lives forever. My own mother's motto was "watch your pennies." In the present context, I finally understand why.

But economists and historians have also warned that we need to be careful about overdoing comparisons to the 1930s. This is not 1933 all over again, partly because monetary and fiscal policymakers have learned their history, so that we are not condemned to repeat it.

The job of monetary policy is to pump liquidity into the system. The job of fiscal policy is to pump stimulus into the system. The job of our leaders is to pump confidence into the system.

Monetary policy has already done its job. Money has never been cheaper than it is now. The problem is credit, which has never been tighter. In the budget yesterday, the government sent the commercial banks a message to lighten up by "providing $200-billion through the Extraordinary Financing Framework to improve access to financing for Canadian households and businesses." In other words, Ottawa is giving the banks a money-back guarantee.

As for the stimulus package in the budget, Ottawa's number is an impressive $40 billion over the next two years, with $20 billion in infrastructure and housing, and another $20 billion in personal and corporate tax cuts. The $12-billion infrastructure program includes three dozen line items including $212 million to rebuild the Champlain Bridge in Montreal. (Beleaguered South Shore commuters might observe that it's been under reconstruction ever since it was built in the 1960s). There's even $2 billion for universities, which will have to be passed through the provinces, but it's a welcome development. Quebec's universities alone are underfunded by $400 million for their very real needs.

In the nearly $8 billion of housing investments, there's $2 billion for social housing, including seniors and aboriginals. The NDP will have a very difficult time explaining why they are voting against this, and the Liberals will be voting in favour of it. This is nothing less than a Liberal budget from a Conservative government. Much of the infrastructure money is aimed at cities, a core Liberal constituency. There is every reason for Michael Ignatieff to announce his support for this budget today, notwithstanding his reservations about tax cuts.

It remains to be seen whether tax cuts will have a stimulative effect at a time when Canadians are more inclined to save for the rainy day that has already arrived, or pay down some of their consumer debt. But the intent is clear - the ceiling of the lower- and middle-income tax brackets has been raised. The middle-class tax cut sees the bracket increased to nearly $82,000, retaining the middle tax rate of 22 per cent, rather than rising to the top rate of 26 per cent. In Flaherty's view, there's never been a better time to buy that flat-screen TV. In the circumstances, he would prefer you not put the money into a tax-free savings account, a product that has been flying off the shelves at banks since its introduction at the beginning of the month.

Flaherty's calculation is that the recession will be steep but short, with the economy pulling out of it, after only three quarters of negative growth, in the second half of this year.

His bet is that the budget will generate nearly two per cent of GDP growth, and create nearly 200,000 jobs. Among the jobs depending on Flaherty being right is his own.

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