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The Progressive Economics Forum

Harper economics lead to a Harper deficit

Harper-economics lead to a Harper-recession and now to a Harper-deficit

Louis-Philippe Rochon
Associate Professor, Laurentian University
Co-Editor, Review of Keynesian Economics

Confirmation federal government finances have fallen back into deficit raises more questions about Harper’s image, now more myth than reality, as a sound economic manager.

A deficit of course was inevitable once you accept Canada has fallen into a Harper-recession: negative growth and falling revenues make a deficit a sure thing. This comes as no surprise to many of us who had predicted as much.

But what is particularly troubling of course is the government’s refusal to acknowledge the possibility of a recession, let alone the existence of a deficit. Yet, this is crucial if we have any chance to salvage this economic mess. The longer we wait to address the problem, the greater the possibility that it will become far worse.

But Harper has invested too much political capital in eliminating the deficit, mostly through accounting trickery, to result in a mea culpa. While news that his policies have failed deals a considerable blow to Harper’s reputation as an agent of fiscal righteousness, he will find salvation in the only place he knows: more austerity.

In many ways, Harper shares this characteristic with Angela Merkel who stubbornly refused to give Greece some debt relief. She was ideologically convinced that more austerity was the cure, not less. Harper is the same. Nothing will convince him that spending more in a recession will cure the economy. He admitted as much this week when he responded to the possibility of a “downturn” by saying that this will be met with increased fiscal restraint.

The underlying story to this sad economic saga is that Harper’s economic policies have failed Canadians greatly. Unable to produce growth, resulting instead in a Harper-recession, unable to lower significantly the unemployment rate (which stands closer to 9.5% once you account for the decline in labour participation), policies of austerity once again point to a predictable failure.

Yet, Harper’s stubbornness comes at an obvious price at the beginning of this unofficial election campaign. How foolish does he now look having made great fanfare of his $3 billion childcare benefits just hours before the confirmation of the Harper deficit? In private, his advisers know we are in a recession, and they must be working through the nights trying to figure out what to say, and how to say it.

But the correct pro-growth policies won’t be coming. Rather, I expect the Austerians in Ottawa to tighten the finances even more. Harper will be desperate to balance the books and to be restore his image as the great economic savior. His message will be clear: in these times of great instability, Canadians must re-elect the trusted party of sound finance. Now is not the time to rock the boat.

And Canadians may just buy this story, unfortunately. They won’t understand that Harper’s economics is to blame, rather they will accept the government’s story that blame must be laid at the feet of international event and the unpredictable oil crisis. Yet, we all read the same data and we all knew what was coming. Harper chose not to act, and to follow austerity policies, despite the fact that there is zero empirical support for such policies. They have failed us in the past, and they will fail us again today.

This brings us then to the consequences of Harper economics: with the first half of the year in a recession, with cutbacks coming, don’t expect the third quarter to be any different. So far, predictions including those from the Bank of Canada, show only modest growth. Yet, those predictions have persistently been revised downward. I expect the negative drag on the economy to continue into the third quarter of 2015, making this recession more than a technicality, as some pundits are trying to spin this story.

This means that by election time, Canadians will have confirmation that the first half will be in recession and that July was probably also in negative territory. Will this be sufficient to convince them to elect another party with a promise to spend on infrastructure?

Enjoy and share:

Comments

Comment from Larry Kazdan
Time: July 31, 2015, 5:27 am

Letter in Alberni Valley Times (followed by LetEd footnotes)

Re: With twice the debt of California, Ontario is now the world’s most indebted sub-sovereign borrower, Dmitrieva and Gutscher, July 20, 2015
http://business.financialpost.com/news/economy/with-twice-the-debt-of-california-ontario-is-now-the-worlds-most-indebted-sub-sovereign-borrower

Standard & Poor castigates Ontario for running up additional debt which demands ever increasing interest payments. There should be another option – low-cost financing from the Bank of Canada. After the great financial crisis of 2008, the federal government created a $200 billion Extraordinary Financing Framework to bail our commercial lenders. If the government can make huge loans to big banks, credit card issuers, retailers and car dealers, it can also lend modest amounts to provinces and municipalities for vital public infrastructure. Well-known constitutional lawyer Rocco Galati and COMER (Committee on Monetary and Economic Reform) are currently suing the Bank of Canada on the grounds that it fails to make low-interest loans to provincial governments though mandated to do so.

Provinces and municipalities should support this lawsuit and help make the banking system work for Main Street and not just Bay Street. The federal and provincial governments must renew infrastructure not only to kick-start the economy and put people to work, but also to leave a legacy of public goods for future generations. The answer is to pay interest expense back to ourselves rather than hand over huge sums for the benefit of private banks and foreign investment funds.

Footnotes:

1. Rocco Galati challenges role of Bank of Canada in latest case
http://www.cbc.ca/news/business/rocco-galati-challenges-role-of-bank-of-canada-in-latest-case-1.3065650

The lawyer best known for stopping the Supreme Court appointment of Judge Marc Nadon has turned his sights on the Bank of Canada. Rocco Galati has taken on a case for a group called the Committee for Monetary and Economic Reform, or COMER, which wants the central bank to return to the practice of lending […]
2. Improving Access to Financing and Strengthening Canada’s …
http://www.fin.gc.ca/pub/report-rapport/2011-7/ceap-paec-2f-eng.asp

To soften the impact of the crisis, the first phase of Canada’s Economic Action Plan included measures to provide up to $200 billion to support lending to Canadian households and businesses through the Extraordinary Financing Framework.

3. Economist John Hotson
http://livingeconomiesforum.org/1996/15hotson

When the Bank of Canada encourages the Canadian government, provinces, and municipalities to borrow in New York and Tokyo it is a betrayal of Canada. Where should they borrow when new money is needed for government spending? They should borrow at the government owned Bank of Canada, paying near zero interest rates-just sufficient to cover the Bank’s running expenses.

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