ITS THE ECONOMY STUPID
It would be a gross understatement to say that the outlook for the global economy is not good.
In its October 2014 World Economic Outlook (WEO), the International Monetary Fund (IMF) reduced its forecast for global economic growth to 3.3 percent for 2014, 0.4 percentage points lower than in the April 2014 WEO. The global growth projection for 2015 was lowered to 3.8 percent. China accounts for one-third of this growth and without China growth for the global economy would be less than 2.5 per cent.
The IMF has been downgrading its forecasts for global economic growth since 2010.
This is not good and G20 leaders who will be meeting in Brisbane, Australia in November better wake up. (Refer to our article on better borrowing)
According to the IMF, “Downside risks have increased since the spring. Short-term risks include a worsening of geopolitical tensions and a reversal of recent risks spread and volatility compression in financial markets. Medium-term risks include stagnation and low potential growth in advanced economies and a decline in potential growth in emerging markets”.
The EURO area is on the verge of its third recession since 2008. The Chinese economy is dramatically slowing, as are the economies of Brazil and India. Russia is about to fall into a recession and growth in developing economies is stalling.
Only the U.S. economy has shown signs of recovery, but even the U.S. economy is operating well below its potential and cannot on its own drive the global economy. The fact is the global economy has never recovered from the 2008-2009 recession and, as predicted by the IMF, is now entering a period of “mediocre” or “stagnant” growth.
Stock prices have plummeted, risks premiums are rising in bond markets, and exchange rates are becoming misaligned. Oil prices have fallen by almost 25 per cent since June in response to oversupply, slower demand growth for oil, and OPEC politics. No one knows for sure how long this can continue.
One would think that Prime Minister Harper and Finance Minister Joe Oliver would be just a “little bit” concerned about what is happening globally and what it could mean for Canada. By all-important economic indicators, the Canadian economy has not been doing well for the last five years.
The oil production sector in Alberta is now facing lower world oil prices and significant uncertainty as to how the future will unfold. With the much lower than expected oil prices, we can no longer expect Alberta to be the driver of economic growth in Canada. The IMF is forecasting growth for Canada of 2.3 per cent for 2014 and 2.4 per cent for 2015. The unemployment rate is forecast to stick around 7 per cent. Even these modest forecasts might be too optimistic.
Hardly an impressive performance, but Mr. Harper and Mr. Oliver seem quite happy with this outlook.
You would think that the number one priority for the government and all political parties for the coming election would be how to strengthen economic growth and job creation.
For two of the political parties, this doesn’t appear to be the case. The Conservative party and the NDP have already begun to compete to buy voters with their own tax money.
The Conservative government has announced that it will double the child fitness tax credit and make it tax refundable. Families will be able to take advantage of this change when they file their 2014 tax returns. The Conservatives have also promised to extend the fitness tax credit to adults and to double the allowable annual contribution to the Tax Free Savings Account.
There are also rumors that the Conservative government will expand the Universal Canadian Child Benefit (UCCB) to include children from 6 years of age to 12. This could double the annual cost from $2.9 billion to almost $6 billion, while contributing little to the cost of day care expenses for Canadian families. By the way the UCCB is taxable.
It is well known that the Conservative government is also committed to introducing income splitting for families with children under the age of eighteen, despite the overwhelming evidence that this change would benefit only a small number of high-income families.
The late Jim Flaherty understood very well that this tax proposal made no sense politically or financially. It will cost the federal government $2.5 billion annually.
Expanding the fitness tax credit and the UCCB and introducing income splitting would cost a total $5.5 billion annually. In other words, they would use up most of the projected surpluses, while contributing absolutely nothing to economic growth and job creation.
To make matters worse, income splitting will also reduce provincial revenues by $1.7 billion annually. Ontario alone will lose $1 billion annually at a time when it is struggling to fix its fiscal problems. One can only imagine the reaction of Premier Wynne to this change.
The federal government keeps saying that the provinces must urgently address their fiscal pressures. Yet, the federal government keeps downloading additional expenses onto them. And this is done without any consultation. Perhaps the provinces should think about re-opening their federal-provincial tax treaties.
The NDP is not without its own attempt to buy off voters with a proposed federal-provincial childcare initiative, which when fully implemented would cost $5 billion annually: funded 60% federal and 40% provincial. The NDP claim their proposal will pay for itself, and with appropriate labor market responses some of the costs may be offset. But this will take years and no one knows how much offset there could be. The reality is that this program will absorb a significant part of the projected surpluses. And again how are the provinces expected to pay for their share.
Why should Canadian taxpayers be given any tax cuts now? The Canadian economy can’t afford them. A smart government would not do any of them. A smart government would focus on making the critical investments that will strengthen economic growth, productivity, and job creation.
The best way to support childcare is to put in place policies that support growth and create jobs. We believe that Canadians, even those who would benefit from the Conservative tax cuts, would agree.
The Liberal party appears to be taking a different policy approach. This past Sunday the liberal leader, Justin Trudeau, in an interview on CBC’s French-language service Radio Canada, said that a Liberal government would give priority to infrastructure investment, education and research over tax relief. The question that now remains un- answered, however, is what would he do with the tax cuts that the government will implement in its upcoming “mini-budget?
Mr. Harper and Mr. Oliver are about to waste the modest surpluses that have been achieved by cutting government programs and services to provide tax breaks to a small number of Canadians. These tax breaks will contribute nothing to economic growth and job creation.
The fall economic and fiscal update is expected soon, perhaps as early as this week. The Harper government will set out new economic and fiscal projections for the current fiscal year and the next five. How relevant will these projections be given the dramatic turnaround in the risks that we have witnessed in the last few weeks?
In the fall of 2008 Mr. Flaherty presented a fall Economic and Fiscal Update, which said there would be no recession and there would be surpluses forever. The Prime Minister told us that with falling stock prices he had advised his mother that it was a “good time to buy”.
So what do we have now? Does the Prime Minister believe that this is a good time for seniors “to buy”?
We don’t think so and we are both seniors.