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The Progressive Economics Forum

ROCHON on the upcoming federal budget (April 2015)

THE FEDERAL BUDGET AND CANADA’S ANNUS HORRIBILIS

See Original post here for the CBC.

Canada’s Finance Minister Joe Oliver announced a new – and long overdue – federal budget for April 21. With the Canadian economy doing so badly, this budget will be crucial.

Will the minister do the right thing and give Canadians a budget that will stimulate the economy? Or will he continue with the government’s obsession of balancing the budget and further doom the Canadian economy to a recession?

The facts about the Canadian economy are not encouraging: increasing unemployment (a real unemployment rate of nine per cent), and economic growth once again in negative territory.

A recent analysis on PBS even questioned whether a recession is imminent, and I have gone on record to say 2015 will be Canada’s ‘annus horribilis’.

In light of this economic mess, the government tried to change the channel on us, and focus our attention away from the deteriorating economy to terrorism.

The government wanted to convince us that another attack was somehow imminent and that terrorism is what threatens our livelihood.

Economy is No. 1 priority

But Canadians wanted none of it.

To our credit, we told the government we want jobs. Polls indicate Canadians overwhelmingly see the economy still as more important than protecting us from terrorism.

We have told the government in a strong, unified voice: the economy is still our No. 1 priority. So expect the government to address this matter, for ignoring it will come with some real dangers at election time.

Bank of Canada governor Steven Poloz is trying his best at keeping our economy afloat by lowering interest rates, but this will have little or no effect. When the economy is this depressed, monetary policy becomes ineffective. Mr Poloz can lower rates again but what we really need is more fiscal policy.

So as the economy deteriorates even further, the focus will inevitably be on the federal budget.

Yet, the federal government seems uninterested in helping the economy. Instead, it prefers to give out some tax benefits here and there, with no clear fiscal strategy. And if 21 is anything like the past, there will be nothing in this budget that will stimulate the Canadian economy.

Shrink the government?

So what’s going on? Why is the government so obsessed with balancing the budget?

There are two grand views of how economies work. Some, like myself, see economies as naturally volatile and unstable, and in need of government intervention on a regular basis to prevent the economy from falling into periodic recessions or worse, into crises.

Private markets are driven by speculation that destabilizes the economy. Regulations are needed to keep it orderly.

Others, like Mr. Oliver and Harper, see free markets as wise places, prone to stability. Government intervention is destabilizing and is not welcome.

What is needed, in fact, is to shrink the size of government. This is achieved first by lowering taxes, thereby lowering revenues and creating deficits. Then, to balance the budget, governments must cut expenditures.

These are diametrically opposing views. Which one is right?

To answer this, one can just turn to recent history. Since 1980, governments around the world have dismantled regulations that had kept our markets fairly stable until then.

What happened next is supported by a massive amount of data: increased inequality, higher unemployment, lower wage growth, greater volatility. And now the IMF says lower unionization rates contributed to great income inequality.

In light of this, the problem with the view shared by the prime minster and his lieutenant of finance therefore is that history does not prove them right. In fact, if anything, the ongoing crisis, which began in 2007, is proof of how markets acting on their own can easily deteriorate into a world crisis from which only fiscal policy can save it.

This is the lesson taught to us by John Maynard Keynes: 80 years after he published his great book, the world still needs governments to soothe the savage beast.

So with our economy inching itself toward another recession, will the government still stick to its dangerous ideology of free markets? Or will it recognize that it is in need of some serious stimulus.

I hold little hope the budget will contain any promising news. In the end, the government will tell Canadians: “let them eat cold camembert.”

Enjoy and share:

Comments

Comment from Larry Kazdan
Time: April 7, 2015, 12:41 am

Letter in Hill Times with original footnote to editor:
http://www.hilltimes.com/letters-to-the-editor/politics/2015/04/06/budget-outcome-should-never–be-goal-of-policy-kazdan/41680

Re: Balance or bust? Debate emerges over feds’ push to eliminate deficit in 2015, Andy Blatchford — The Canadian Press — Mar 19 2015
http://www.nationalnewswatch.com/2015/03/19/balance-or-bust-debate-emerges-over-feds-push-to-eliminate-deficit-in-2015/

Cutting government expenditures at a time of high unemployment reduces private incomes,
diminishes tax receipts, increases joblessness, adds to welfare expenses, and
thereby pushes governments further into debt. We learned this during the Great
Depression, and more recently by austerity programs overseas which have devastated
European economies.

The federal budget outcome by itself should never be the goal of policy. The budget is just a tool
to heat or cool the economy in order to achieve real objectives such as price stability and full employment.
In trying to balance the budget whatever the circumstances, Joe Oliver shows he does not understand
the finance minister’s job.

Footnote:

1. Keynes would not support fiscal austerity
http://bilbo.economicoutlook.net/blog/?p=18523

Australian Economist Bill Mitchell:

The fact is that the budget outcome should never be the
goal of policy. The goal should be to maximise real
outcomes and maintain price stability. The problem is that
in elevating the budget outcome to the centre stage and
setting artificial rules, governments are very likely to
damage prosperity.

They will typically also undermine the achievement of
their own targets into the bargain because the fiscal
austerity will reduce growth …..

It is a far better strategy to forget about the budget
balance and concentrate on environmentally-sustainable

Comment from Jared Milne
Time: April 8, 2015, 2:22 pm

The web link to the CBC article wasn’t correctly entered in the above article. Here it is:

http://www.cbc.ca/news/canada/manitoba/the-federal-budget-and-canada-s-annus-horribillis-1.3022246

Comment from Iglika Ivanova
Time: April 9, 2015, 8:10 pm

Thanks, Jared. It’s fixed now!

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