Public Values

Harper's economic recovery plan: cut, and run from government responsibilities

Conservatives still fixated on cutting costs at all costs, even in jobless, growthless economy.

Armine Yalnizyan, Senior Economist with Canadian Centre for Policy Alternativesby Armine Yalnizyan, Canadian Centre for Policy Alternatives (CCPA)

In mid-June, Finance Minister Flaherty went off to meetings with the G8 talking up the idea that it was "time to have a discussion on how to disengage from the fiscal stimulus." Last week in Italy, Prime Minister Harper reluctantly agreed with other world leaders that things were still too shaky to start cutting back on government help.

Back home, as requested by Parliament, the Parliamentary Budget Office posted its second Budget Progress update, an arms-length assessment of the Conservatives' quarterly report card on how their plan for dealing with recession is going. The PBO summarized the latest private sector forecasts and economic indicators – including those that affect people the most, trends in the labour market.

The PBO's reality check showed how rough things are, pointing to declining, but large, deficits for each of the next five years. It called a spade a spade. We now face a structural deficit: not enough revenues for ongoing expenditures when we get to the other side of the recession.

In contrast, official budget documents promised in January that today's deficits would become surpluses in five years. By June's quarterly report the government just stopped talking about deficits entirely.

Softening the blow of the economic crisis faced by hundreds of thousands of Canadian households and businesses is, without question, the immediate priority; and the job is nowhere near done. But, in time, we'll need to dig out of the deficit hole and, as this "heads up" from the PBO noted, it won't be easy.

There are four ways to get out of the hole – more revenues, less spending, real economic growth, or price inflation.

Everyone agrees: When we get there, recovery will be very, very slow. So we won't be growing our way out of the hole in any hurry. That blocks the road to the most painless policy option.

Canadians will say no to higher taxes, fewer services, or inflation; but "no" is not a strategy. Which strategy will the government of the day lean toward?

Inflation seems an easy out, but escalating prices don't mix well with a large and growing swath of Canadians struggling with stagnant or falling wages, or living on fixed incomes. The biggest cohort of retirees we've seen in history, and a disturbingly large group of young families and newcomers, will get bitten hard if we go that route.

When Liberal Leader Michael Ignatieff mused, in passing, that one option could be to raise revenues, he was aggressively attacked by the Conservatives.

It's worth noting that the size of the hole in five years, as projected by the PBO, is roughly in line with the drain caused by the 2 point cut in the GST that the Conservatives brought in. That decision now looks like a self-inflicted wound.

If growth, inflation or more revenue are not answers for the Conservatives, that leaves one last solution – shrink government.

That's exactly what Ted Menzies, parliamentary secretary to the finance minister, said was the plan all along, in his response to the PBO report: cut spending and sell public assets – assets the government can't name, sold into a market that hasn't yet seen bottom.

What cuts are on the horizon? About 30 percent of federal spending goes to income supports for the elderly, the unemployed and children. Another 20 percent gets transferred to the provinces to support social programs. The other half funds First Nations, justice, security, defence, trade, foreign aid, national infrastructure. Who were they planning on creaming first in a jobless, growthless recovery?

Apparently not defence. In 2007-08, defence accounted for close to 8.5 percent of federal spending. It's gone up since. Last week, Defence Minister Peter MacKay announced $5 billion more to purchase armoured combat vehicles as a "renewed commitment to domestic security." He even linked it to stimulus measures, suggesting a new approach to procurement would create jobs for Canadians.

Meanwhile, the $6.4 billion in federal "stimulus" for community infrastructure projects – needed well before the crisis hit – may be cut off before it is all spent. In a carefully crafted message to Canadians, Flaherty has only committed to 80 percent of the budgetary announcements for stimulus (though the tax cuts in the package, worth $20 billion over the next five years, are 100 percent guaranteed). The PBO has elsewhere noted that the Conservatives have only spent $2 of every $3 announced in its budget plans for expenditures.

When Prime Minister Harper first came into power he spoke bravely of Canada not having a tradition of cutting and running, his explanation for keeping our troops in Afghanistan for "the long haul".

He's changed his mind on Afghanistan, but has remained true to his original vision for the people of Canada. Cut and run government was the game plan all along.

Armine Yalnizyan is a Senior Economist with Canadian Centre for Policy Alternatives.

Posted: July 16, 2009

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