Flaherty’s incredible shrinking deficit

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Sun Media, Friday, March 5, 2010

“A balanced budget is not an end in itself, but the foundation of a strong and resilient economy.”

— Speech from the throne

That may be, but there’s a big argument as to whether the deficit is cyclical or structural.

Jim Flaherty maintains it’s cyclical — that’s his story and as finance minister, he’s sticking to it.

And he’s got plenty of help from his department, imperial finance, where they do things like five-year hot charts taking the deficit down from $53.8 billion in the fiscal year ending March 31 to just $1.8 billion in 2015.

That being said, why not take the deficit all the way to zero, since $1.8 billion is pretty much a rounding error, small change in a $250-billion budget that’s likely to be $300 billion five years from now, $298 billion to be precise?

Basically it’s a credibility issue. Flaherty doesn’t want to be accused of wishful thinking, much less cooking the books. “We’d rather be light than heavy,” said a senior member of Flaherty’s entourage during yesterday’s budget lockup at the Government Conference Centre in Ottawa.

Hot chart

And once the second-year $19 billion of stimulus goes out of the door in the next fiscal year, the deficit will decline rapidly to $27.6 billion the following year, $17.6 billion in 2013, $8.5 billion in 2014, and $1.8 billion in 2015.

That’s all she wrote for the deficit. Flaherty wins the argument. The deficit is cyclical, not structural, so there. Next.

In case anyone missed the point, his five-year hot chart is titled, “Rapid decline in deficits.” If proven accurate, the deficit in 2015 would be about one-tenth of 1% of projected GDP, as compared with about 3.5% this year. Even that’s a pretty good story compared to the U.S., where Barack Obama’s deficit is forecast at $1.6 trillion, or 11% of GDP, equivalent to the entire economy of Canada. Yikes.

“By key measures, Canada is performing better than the United States and other advanced countries,” Flaherty boasted in his budget speech yesterday. “Leading authorities praise the stability of our mortgage industry. They point to our financial system as the soundest in the world.”

He had figures, as well as endorsements, to back up his claims that Canada has come through the recession in better shape than any other G7 country, with the lowest debt-to-GDP ratio in the industrialized world (31% compared to 67% in the U.S., and 75% in the United Kingdom).

Not to mention unemployment that’s 1.5% lower than the U.S., which is actually nothing to write home about since jobless Americans aren’t buying anything from Canada and exports are the motor of our economy.

Flaherty also caught a break when the economy grew by 5% in the fourth quarter, buttressing his argument that limiting spending growth and transfers to provinces to 3%, as well as the end of stimulus, is enough to bring the deficit down without necessitating a tax increase.

For the rest, that’s Stockwell Day’s problem over at Treasury Board, where a freeze on departmental spending starts with a symbolic pay freeze for the prime minister, the cabinet, all MPs and senators, as well as their offices.

That’s just the symbolic beginning of a complete expenditure review. Over to you, Stock. Have a nice day.

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