Deja Vue all over again
In the fall of 2008, private sector economists were forecasting that the Canadian economy was already in a recession due to the financial crisis. Prime Minister Harper and his finance minister, the late Jim Flaherty, ignored these warnings and told Canadians there was nothing to worry about. The Prime Minister even advised Canadians that it was a good time to buy stocks, given the fall in equity prices.
The November 2008 Economic and Fiscal Update forecast annual surpluses as far as the eye could see. Two months later this forecast was thrown into the trash. In response to the crisis Harper and Flaherty quickly discarded their Conservative orthodoxy and became “temporary” Keynesians. They introduced the largest stimulus budget ever, in an effort to increase economic activity. After that, deficits were recorded for seven consecutive year until.in this year’s April budget. Minister of Finance Joe Oliver, declared, the government would finally register a surplus in 2015-16.
The elimination of the deficit never had anything to do with good economic policy. The Conservative government’s sole economic policy objective has always been the elimination of the deficit. This is the only criterion that they use to judge their economic record; nothing else has mattered - not stronger economic growth, not increased job creation, not improved productivity, not saving the environment, not greater tax efficiency and tax fairness, and not strengthening federal-provincial and Aboriginal relations. The primary objective of the Harper government has always been to diminish the role of the federal government in economic policy. Eliminating the deficit no matter how small was critical to achieving that objective
The April budget was built on “smoke and mirrors”. These included overly optimistic economic growth and oil price assumptions; cutting the contingency reserve by two-thirds; selling shares in GM at fire sale prices; raiding EI revenues; and even booking “savings” from unilateral changes to federal employees’ sick leave benefits. Without these budget “tricks”, the government could not have paid for its income tax cuts announced last October and still have balanced the budget.
But now the smoke is disappearing and cracks are appearing in the mirrors.
Statistics Canada has reported that economic growth has declined for four months in a row (January to April). Private sector economists have now revised down their forecasts of real GDP growth for 2015 by about 0.6-percentage point. Last week, the IMF also cut its forecast for economic growth in Canada for 2015 from 2.2% to just 1.5%. Some economists are now predicting that Canada is already in a “technical” recession. But who cares?
The reaction of the Prime Minister, and his finance minister Joe Oliver, is similar to that in 2008. Despite the fact that economic growth for this year is now forecast to be substantially lower than that expected at the time of the April Budget, Mr. Oliver is still confident that the federal government will record a surplus in 2015-16. Although the reasons for the current slowdown differ from those in 2008, the public reaction by the Harper Government isn’t. Just ignore it.
In last April’s Budget, Mr. Oliver forecast a surplus of $1.4 billion for 2015-16. This was based on real GDP growth of 2.0% and nominal gross domestic product growth of 1.6% in 2015. In addition, a Contingency Reserve of only $1 billion was included for 2015-16. In previous years, the Contingency Reserve had been set at $3 billion per year.
Using the sensitivity analysis provided by the Department of Finance in the April Budget, a reduction in real economic growth of 0.6 percentage point would result in deterioration in the budget balance of approximately $2.5 billion in 2015-16. This would wipe out the projected surplus of $1.4 billion along with the $1 billion Contingency Reserve, resulting in a “tiny” deficit of $100 million.
There is no fiscal crisis at the federal government level. There hasn’t been one since 1995. The federal net debt ratio is low and declining and is quite sustainable. A deficit of $100 million is completely irrelevant; so is a deficit of $1 billion or for that matter a deficit of $10 billion (.5% of GDP). But the Conservatives have made deficit elimination a political and an election issue. A deficit, even a tiny one in 2015-16, would undermine their political credibility as sound fiscal managers.
Mr. Oliver has stated that he wants to wait until more information becomes available. This is the same argument that he used to delay the 2015 budget to late April. By now, however, Mr. Oliver should have a very good idea about the final fiscal outcome for 2014-15. And although Parliament has recessed for the summer, there is absolutely no reason why the Minister of Finance should not meet with his private sector economists who advise him on the economy. He could then provide Canadians with an updated economic and fiscal forecast in early September.
Canadians deserve to have this information as part of the election debates. In the Netherlands, their independent budget agency is required to provide an economic and fiscal update prior to an election and also cost the parties’ election promises If Mr. Harper and Joe Oliver won’t provide an economic and fiscal update, then the Parliamentary Budget Officer should be asked to provide it.