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The Progressive Economics Forum

The $0.3 Billion Question

Machiavelli has nothing on these guys.  Let’s deconstruct for a moment the central message of today’s 2011 Federal Budget, Take 2:  “Storm clouds are gathering in the world economy.  We must rush to get our fiscal house in order, lest we be struck by another tempest.  We will advance our own ambitious timetable for balancing the budget by a full year.  But to do that, we must review all our programs, to find operational savings of $4 billion per year (or 5% of the cost of running government).  That’s the kind of thing the private sector does all the time, and we will bring private sector discipline to the task.”
So the budget will be balanced in 2014-15 instead of 2015-16.  But wait a minute.  Look back to the March version of the budget: it forecast an infinitesimal deficit of just $0.3 billion for that year.  Getting that down to zero isn’t actually that Herculean of a task, is it?  And it certainly doesn’t require $4 billion in yet-to-be-identified spending cuts.
But this got me wondering?  Why on earth did the March version of the budget forecast such a small deficit for that year in the first place?  $0.3 billion is about one tenth of one percent of total revenues and spending for the government — far lower than any reasonable measurement error, statistical rounding, or other “noise.”  A normal government, if they really wanted to balance the budget, would have just rounded the number to zero (or marginally adjusted one or more of the spending or revenue parameters).  They thus could have claimed to be balancing the books by 2014-15 … if that in fact matters.
Well, that budget was defeated and Canadians went to the polls.  During the campaign the Conservatives issued their pledge to move forward the timetable for balance by a year. Now the budget lives up to that pledge.  The strategic review process is to identify savings that will eventually deliver $4 billion per year, motivated by the desire to balance the budget a year earlier — the rationale for which revised timetable has yet to be explained. The big debate so far has focused on the fact that the government hasn’t identified the cutbacks (a point made by the opposition parties, PBO Kevin Page, and others). The Conservatives say don’t worry, the review process will do that. Lost in the spin are the deeper questions, namely:
1. Why do we need to balance the budget by 2014-15 instead of 2015-16?
2. Why do we need to balance the budget at all?
3. Since the forecast 2014-15 deficit was all of $0.3 billion, why do we need a whole strategc review process and $4 billion of blood on the floor in order to eliminate it?
I am sure there is method to the Conservatives’ madness here, and the fact that the debate is zeroing in on what is going to be cut (as opposed to whether to cut at all) is assisting their spin strategy mightily.  My own Machiavellian theory is as follows:
  • The Conservatives left a $0.3 billion deficit in 2014-15 deliberately, knowing their budget was going to be defeated and hence leaving room for an immediate campaign pledge to move their timetable up a full year.
  • The fact that the Liberals and the NDP both accepted the initial Conservative timetable (balance by 2015-16) gave the Conservatives additional reason to bump the thing forward a year — since they could now symbolically differentiate themselves from the opposition parties (who were now locked into essentially the same timetable anyway).
  • The coming debate over what exactly will be cut, allows the Conservatives to position themselves as the true fiscal conservatives, bringing private sector discipline to the operation of government.
  • The current budget timetable is designed to be exceeded.  For example, the official budget projects only a $4 billion reduction in the deficit in 2011-12.  With GDP growing and the stimulus spending being unwound, this will be vastly exceeded (just as the government just exceeded its own budgetary target for 2010-11 by a whopping $13 billion).  Count on Mr. Flaherty to stand up in the Commons next year, to rousing applause from his side, to announce that thanks to his “prudent management,” the true deficit for 2011-12 will come in several billion dollars lower than the official $32 billion target.  You heard it here first.
  • These phony optics don’t change the fact that the spending cuts will still be very painful. $4 billion in spending cuts, accompanied by normal multiplier impacts (like the estimates contained in the government’s own Economic Action Plan reports) will reduce GDP by close to half a percentage point, and would eliminate tens of thousands of jobs.  More likely than not, we will need that GDP and those jobs, given the storm signals already visible on the horizon.
  • But the whole “advance-the-balanced-budget-by-a-year” shtick provides political cover for the coming and utterly unnecessary pain, because tonight almost no-one is asking why we would want to do this in the first place.

The federal debt as a share of GDP (the true constraint on the long-run fiscus) is already declining.  The crisis in Canada is not our deficit, it’s mass unemployment (still 2 million by the broad measures), corresponding hardship in households and communities, stagnant and polarizing incomes, and the risk of another round of macroeconomic turmoil.

The primarydebate should not be about what gets cut, but why we’re cutting in the first place.  It sure isn’t about converting a $0.3 billion deficit into a balanced budget.

Enjoy and share:

Comments

Comment from duncan cameron
Time: June 6, 2011, 10:04 pm

Thanks Jimbo for revealing the fiscal situation the Cons want to keep hidden.
This budget is about smaller government, and lower taxes. The Cons want to introduce tax cuts in four years time, just before the next election. So they do the balanced budget B.S. in three years instead of four.
The real story is the 80,000 federal public service jobs the Cons promise to eliminate through “attrition.” As Armine and David have shown in the CCPA brief, and David explains in his Behind the Numbers, real people are going to lose their jobs through the austerity policy. Retirement alone will not cover what the Cons want to achieve in reducing public service employment. I have a piece about this on rabble.ca Tuesday.

Comment from John W. Warnock
Time: June 7, 2011, 8:37 am

So Jack Layton and the NDP platform promised to balance the budget over four years without raising any taxes. How did they plan to do that?

Comment from Travis Fast
Time: June 7, 2011, 10:30 am

It would have helped if all the parties had not initially participated in the no deficits meme and then all participated in the balanced budget meme. I kept waiting for one journalist to ask Jim F. what he would do if the economy went back into recession. It is both an overly optimistic and overly austere budget. If the economy grows as they expect they do not need the review as you point out. If the economy stagnates it is not at all clear that shrinking the size of government is the solution. The contradiction is resolved when we realize that like in the US, the dialogue is being driven by ideologues who simply want to shrink the government.

Comment from Richard
Time: June 7, 2011, 11:13 am

Gee guys.What is wrong with shrinking the government.The most costly and inefficient organization in Canada.The time is right to restructure and weed out the waste.

Comment from Darwin O’Connor
Time: June 7, 2011, 11:43 am

“The most costly and inefficient organization in Canada.”

Do you have any empirical evidence to support this, besides anecdotes dug up by the media and opposition?

Comment from Paul Tulloch
Time: June 7, 2011, 1:22 pm

I am always amazed at the popular notion of government. But it has to be taken on.

1) all large entities suffer from what I would call the bureaucratization effect. Public /private/ not for profit, all suffer from some form of organizational inefficiency. However the main variable here is size of the entity (employment size). The private sector does a much better job (maybe not of late) with non-disclosure of organizational (in)efficiency. If, as suggested here, the profit motive somehow rationalizes the private sector and produces efficiency in the face of organizing complex tasks aka the work that has to be done , then why do we have so many cases of oligopoly? Could this be due to competition and superior efficiencies? No it is the opposite- it is all about constructing massive barriers to entry! So organizational efficiency is a factor but not that which defines public or private institutional success or failure.

Organizational success at the large level has a causal structure that is quite a bit more complicated than the running of a mom and pop store or even a small group of mom and pop stores.

2) why do we have so many failed cases of privatized efforts of formerly large scale public sector supplied goods and services? So many cases to pick the carcass from.

3) in many cases the organizational aspects of a public sector institution are more than cost oriented that seems to be the prevailing mode of organizational motivation in the private sector. Accessibility, service requirements, regional motivations, etc. One big example- transportation industry.

I could go on but I will leave it at that for now. It is a hugely complicated question you raise but I leave you with this one to ponder.

Krugman and the Physicians for National Health program in the USA have been comparing the privatized healthcare of the US against the Canadian model for some time now. Canada’s public healthcare, when you get closer to objectively comparing the twp comes out heavily in favour of Canada’s public health care and at a cost that is almost half.

Comment from lana payne
Time: June 7, 2011, 1:28 pm

Jim,

I agree the question should be why are we cutting at all. I am not an economist but the $6 billion in extra corporate tax cuts this year that will mostly benefit super-rich banks and oil companies could have been used to: 1. eliminate senior poverty ($1 billion); 2. start a national child care program ($1 billion) 3. save 80,000 federal public sector jobs and the services they provide. Once again budgets are all about choices and in this case fundamentally changing government and reshaping the face of our country.

Keep up the excellent work Jim.

Lana Payne

Comment from Paul Tulloch
Time: June 7, 2011, 1:50 pm

the additional question that we have here is- why are we cutting and who benefits.

first as to who benefits- as indicated by a recent CCPA paper, government products and services benefit middle and lower income families to the tune of over 30K a year, whether it be in direct transfers or services (and that is for those that can be calculated, there are many public services that have no price attached to them but are priceless, like decent healthcare for all).

So when Harper states that we have to cut government services who is losing the most benefits here- i.e. who is taking the hit? It sure is not the wealthy.

We why are we cutting? especially as we go hurling headlong into another downturn since the beginning of the great recession. We are playing with fire here- austerity is like trying to put out a fire with a full gas can.

But really why are we cutiing? It is not for some tax cut before Harper gets elected, although that is a means to his end. What are Harper’s ends here?

It is the dismantling of the Canadian governing body and replacement by some quasi, privately controlled profit maximizing entity. It is his ideology, he read way way to much Ayn Rand. A moral extinguishing of the state as an apparatus for progressive change. It is the neo-con dream.

Anybody who actually understood the gutting of the census, knows what this newly hot button issue elected ideologue fresh water “economist” is up to.

However as we move towards a higher dollar and the life support that the manufacturing sector has been on for the last three years fails, combined with the new found austerity hammer in Harper’s hands- the citizenry will be recalling the day with public grandeur the day, one page a Ms Depape held up a sign in parliament that said STOP HARPER.

Wow I cannot believe Layton came down on this young woman? Is he moving to the center already, the first act of real political decision making and Jack already cuts to the center- watch out my labour friends- keep him honest!

Comment from Travis Fast
Time: June 7, 2011, 6:58 pm

@Richard
OMG Dick I never thought about it like that before. Thanks.

Comment from Richard
Time: June 8, 2011, 12:29 pm

Empirical evidence.IN the apple industry in ontario there was a government funded program to remove old orchards .This plan was implemented with a budget of approximatly 3.5 million dollars.The farmer was responsible for removing the trees and preparing the land for future agricultural use.The administative cost by government was budgeted around 1.2 million dollars.How many government officals where involved to justify this cost.THAT’S ALOT OF PAPER TO PUSH .That reminds me of the joke .How many people does it take to replace a light bulb…..

Comment from John Stapleton
Time: June 12, 2011, 12:25 pm

Harper/Flaherty Budgets are highly formulaic: Buy jets, guns and prisons and then say you have run out of funds. With no funds and public scarcity firmly in place, install a firewall around a number of programs your faithful do like and annul policy discussion about the value of anything you don’t like by saying there’s no money.
Then cut the things you don’t like, not because you wanted to but because there’s no money.
None of this has anything to do with economics, evidence or policy. It’s all about getting your own way…your way and to heck with the rest of us.

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