You heard it here first: federal budget update

Today’s front page of the Globe and Mail business section calls out, Flaherty’s budget wiggle room shrinking.Which is indeed true, but what I find amusing is that I broke this story back in January. At the time, this was outside the consensus so many blew it off. But now that the mainstream has caught up, do I or any other folks at the CCPA get the call? No, the reporters go back to the same old sources as ever, the ones who failed to connect the dots back then.

On a bigger scale this happened with the Alternative Federal Budget back in the late 1990s and early naughties. Back then Jim Stanford was doing our fiscal forecasting, and Jim predicted smaller-than-tabled deficits, and later, larger-than-tabled surpluses. The AFB was the only one making this commentary, and finally after many “surprise” budgets – that closed the year with embarassingly large surpluses when nary a drop of black ink was to be found in the originating budget document – it came to be the conventional wisdom among grey-suited Bay Street economists. For a few years the media finally got the story right, but never did their stories mention the CCPA even though we first raised the alarm.

Anyway, the point of this latest story is that a deteriorating economic picture means a deficit, which means spending cuts if the government insists on a balanced budget at all costs. Flaherty recently conceded this point, although at the time of my AFB technical paper, the official line was that last October’s tax cuts were the government’s fiscal stimulus plan. This is a dumb approach to fiscal policy at a time when even the IMF is freaked out about $1 trillion in losses stemming from the housing financial crisis.

Interestingly, my argument for a deficit if need be seems to be catching on. The bank economists interviewed for the story were in agreement with me that a deficit is not the end of the world (thankfully, no plagiarism this time):

Economists said a deficit would have little impact on the economy because it would be small, Canada’s finances would return to surplus as soon as the U.S. economy recovers and the government’s reputation as prudent fiscal manager is entrenched with global investors.

“The zero-deficit line seems to have more political importance than economic importance,” said Ted Carmichael, a senior economist at J.P. Morgan in Toronto. “Deficits are a big problem if you have a weak balance sheet. Canada has a strong balance sheet.”

Relentlessly Progressive Economics: Tomorrow’s conventional wisdom, today.

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