The D Word
My Alternative Federal Budget technical paper from last week seems to have single-handedly re-inserted the word “deficit” into Ottawa’s policy lexicon after a decade’s absence. A couple good columns have come out repeating the main premise of my paper (see Thomas Walkom in the Toronto Star and Frances Russell in the Winnipeg Free Press). And every story that raises the prospect of a US recession, and what that means for Canada, eventually comes back to implications for the federal budget.
There are detractors, of course, who prefer to rely solely on monetary policy, and who view fiscal policy as ineffective and ill-timed. I disagree. While we do need to lower interest rates, this is increasingly an ineffective policy because there is little ripple effect from changes in overnight rates at the Bank of Canada to the rest of the interest rate structure. We are seeing, if anything, higher rates from banks for commercial and household lending due to the credit crunch, and the “flight to quality” in the financial markets is driving down interest rates on medium-term government bonds.
So we need to put fiscal policy options on the table. The critique that fiscal policy comes too late has some merit to the extent that recessions are short-lived and fiscal measures involve a lot of long-term planning (like building a new bridge). But other fiscal measures can be brought to bear. The key is to get money quickly into the hands of people who will spend it. Some of this will happen automatically â€“ the small surplus on the Employment Insurance account will revert to a deficit should the economy go into recession. That is a good thing, and the government should consider measures that would enhance the eligibility for EI so that more unemployed workers would benefit (currently only about one-third of the unemployed get EI). Another measure could be to enhance the GST credit, which would quickly put more money in the hands of low-income Canadians. And targeted measures could be developed for specific regions and industries that are hard hit.
The worst thing the feds could do would be to cut spending in order to meet the artificial objective of a balanced budget. Revenues will slow, perhaps fall, should the economy turn down, and the feds should let any resulting deficit happen, not pile on with spending cuts. Canada is the only G7 country to have run surpluses in recent years, and is well-positioned to run deficits if need be. In the US, the Bush-Bernanke $100 billion “stimulus package” has been criticized as not stimulative enough, even though the context is a previous year’s deficit above 2% of GDP. In Canada, an equivalent deficit would be above $30 billion.
As for infrastructure, we should be getting prepared with some big ticket items that we need anyway. The labour market is currently strong but the fallout for construction could be large over the next year or two. The fact that the US recession is being driven by a dramatic fall in asset prices (in the past, we call such an event a “depression”) suggests this will not be your garden-variety post-war recession with a quick drop then a return to business as usual. This could take a couple years to play out, and any resulting slack in the employment market could be absorbed by needed capital investments in social housing, public transit and early learning (child care) centres.