Outrage at new deficit figure is pure political posturing

The Liberals, NDP and Bloc all demand more spending while decrying deficit

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The Gazette, Sunday, May 31, 2009

A federal deficit that was forecast at $34 billion as recently as the January budget is now projected to be a least $50 billion. That's quite a miss, 50 per cent on the upside, from a finance department better known for underestimating the surplus during the era of the fiscal dividend.

Then again, as our editorial page noted the other day, $50 billion isn't what it used to be. It doesn't go far as it used to, either. Or in the immortal words of Yogi Berra, you get cash and it's as good as money.

In the House of Commons, the opposition parties were shocked and appalled, demanding that Finance Minister Jim Flaherty either resign or be fired, his credibility in tatters, his competence destroyed.

Then the Liberals demanded that Flaherty add another $1 billion to the ballooning deficit by lifting regional variations on qualifying for Employment Insurance and imposing a national minimum standard.

And of course, the NDP would like Ottawa to guarantee the pensions of autoworkers that are on the table in talks to restructure the North American auto industry.

As for the Bloc, it just wants more money for Quebec, starting with the forestry industry.

In politics, you have to make more than the usual allowances for hypocrisy.

There's no doubt that underestimating the deficit number by 50 per cent is a big miss. Flaherty and his officials at finance have some explaining to do about that. The best and brightest minds in government work there, and let's just assume they're not responsible for running their own household budgets.

Flaherty's explanation is interesting, but it still doesn't explain such a big miss, which goes to the core competence of fiscal forecasting.

His story, and he's definitely sticking to it, is that higher EI payouts, lower tax receipts and the cost of bailing out Detroit, among other things in the Great Recession, are responsible for the $50-billion deficit.

Yes, but his officials knew that, or should have, when they were doing the budget in January. Budget forecasts reflect neither worst-case nor best-case scenarios, but a consensus. And this consensus was wrong, way wrong.

A $50-billion deficit is, in current dollars, the largest in Canadian history. And this is from a Conservative government. If you think the true believers on the right were annoyed at Harper before, they'll be furious now.

But welcome to the real world. And in the real world, we're in the middle of the steepest economic downturn in three generations, and no one knows when it will end.

And the size of the deficit, measured as a percentage of GDP, is no real cause for concern.

At $34 billion, the deficit was going to be two per cent of output. At $50 billion, it will be three per cent. That's not a problem, though it will gobble up, in one big bite, half of the $106 billion paid down on the national debt since the books were balanced in 1997.

But if you want to see a real number in terms of a deficit as a share of the economy, have a look at Washington, where the deficit is $1.75 trillion, or more than 12 per cent of GDP. That's more than the entire output of Canada, and we are still a G7 economy. But we don't have the issues confronting Barack Obama - the sub-prime housing mess, the bailout of banks, and wars to finance on two fronts. Not to mention that Obama is also the new CEO of Detroit Inc.

A deficit at three per cent of GDP is something we can take in our stride, precisely because of our virtuous cycle. Our national debt has been reduced from 70 per cent of GDP to about 30 per cent. The U.S. national debt, which increased from $6 trillion to $11 trillion during the Dubya years, might soon exceed 100 per cent of GDP, the kind of number that gets countries put on credit watch.

Then three per cent of GDP is nothing compared to the number Pierre Trudeau left Brian Mulroney, or that Mulroney left Jean Chrétien in 1993.

Having increased the national debt by 1,100 per cent during his 15 years in office, Trudeau's parting gift was a $38-billion deficit that was nearly nine per cent of the economy. The debt doubled again on Mulroney's watch, and he left Chrétien a deficit of about $40 billion, or five per cent of the economy.

All the outrage over the deficit number should be in the usual context of the sound and fury of politics. Pure posturing.

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