ECONOMIC ASSUMPTIONS
Finance Minister Jim Flaherty ignoring some key facts in Thursday’s budget, says David Olive,
The budget Jim Flaherty will deliver Thursday has one simple, and simplistic, goal. This is to rein in government spending in order to eradicate a deficit the finance minister projects at $26 billion.
“Our recovery is fragile,” Flaherty told his Tory caucus colleagues on Tuesday, “(and) we face significant threats from abroad.”
Some facts that elude Flaherty and his budget architects:
Flaherty’s budget will seek to justify cuts and freezes in spending on weakness in the domestic and global economy. In fact, the Canadian economy, which showed surprisingly strong jobs growth last month, may grow faster than Ministry of Finance projections. That would increase tax revenues and reduce social-support outlays, showing the current deficit projection to be an exaggeration.
It’s worth noting that in seven years as finance minister, Flaherty has never approached accuracy in his core projections.
Canada’s GDP growth rate will likely outpace Finance’s projections since the “threats from abroad” will abate. These external threats are a slow-growth U.S. economy and Europe in crisis. Those conditions will improve as American GDP growth picks up significantly in the later years of Barack Obama’s presidency, and the four-year-old sovereign-debt crisis in Europe is finally resolved.
We know from the recent American and British experience with austerity chic that you cannot cut your way to prosperity. Indeed, sucking demand, or cash, out of an economy with cutbacks to government spending — including essential services and infrastructure upgrading — merely adds to the jobless lines and cuts household incomes. That, in turn, drives up social-spending costs related to mounting unemployment.
Even “holding the line” on government expenses, rather than outright cutbacks, is a retardant to future prosperity and global competitiveness. That’s because we have the good fortune of being a rare industrialized economy with a growing population, a distinction we share with the U.S. The key to keeping Canada growing is the 2.5 million immigrants we take each decade, since birth rates among nonimmigrants are among the world’s lowest. This places an obvious demand on Ottawa to increase short-term spending merely to keep up with legitimate requirements of a growing population. Immigrants are drivers of GDP growth, conspicuous in launching new businesses and creating jobs.
Harper’s doctrinaire small-government ideology, dating from his youthful policy chief role at the defunct Reform Party, might actually make sense if the private sector picked up the slack. But it doesn’t. Quite the opposite: As Mark Carney, governor of the Bank of Canada, has repeatedly and accurately noted, Corporate Canada is sitting on trillions of dollars of “dead money” it refuses to reinvest in the economy, even as executive pay continues to skyrocket.
That leaves government, which lacks a profit motive, to do the right thing — ironically enough, on behalf of businesses that would lack paying customers without state bolstering of household incomes. But Harper’s career obsession has been to shrink government. The chief means of doing that is to forsake government revenues. Slashing the GST — as the world was heading into a gut-wrenching recession, no less — robbed gov- ernment of trillions of dollars, a policy blunder for the ages, though the people-pleasing measure did help Harper finally win his first, minority government seven years ago. Next Harper sought to gut Ottawa of its corporate-tax revenues, reducing the tax take to a current 15 per cent, by far the lowest among major economies. (The U.S. corporate tax rate is 35 per cent.) But business isn’t motivated by lower taxes. What it most craves is low wages. Thus Caterpillar Inc. last year abruptly ended more than half a century of locomotive manufacture in London, Ont., relocating the operations to low-wage regions of the U.S. and Mexico. Meanwhile, Harper’s ultralow corporate tax deprives Ottawa of $13.7 billion a year, according to Finance’s own estimates. That’s enough to wipe out the deficit in two years without cutting a single program. Then there’s “tax leakage” to offshore tax havens, currently a hot topic before the Commons finance committee. Harper government officials have testified at committee that they can’t say how much corporate and individual tax avoidance amounts to and is costing everyday taxpayers who meet their obligations. “It’s as if Harper is determined to make government less effective by methodically stripping it of every source of income,” says Peggy Nash, NDP finance critic. Her Tory colleagues on the finance committee are decidedly sanguine about tax havens. By an accident of history we live in the world’s biggest branch-plant economy. That’s no reason to import our economic policy-making from jurisdictions firing on less than all cylinders. dolive@thestar.ca