Time to break an election promise
Last night when I was watching the US presidential debate on Newsworld, the ticker told a one-line story that the Conference Board of Canada’s latest forecast for 2008 economic growth has been lowered to 0.8%. It was a redemption or sorts because back in February I testified before the House Finance Committee with Glen Hodgson of the Conference Board. I was the skeptic whereas Hodgson bullishly stated that the Canadian economy would grow 2.5% this year. So I’m not sure their latest prediction is worth much. Why to the media keep going back to the Conference Board every time they make a prediction without ever bothering to see if past predictions have panned out?
The main point is that we are headed into a recession, probably a long and nasty one. But how long and how nasty depends on how governments react. So now that the election is over, it is time to abandon balanced budgets, and start focusing on what a realistic planning deficit for 2009/10 should be. All parties endorsed balanced budgets in the election campaign with almost religious fervor. They need to renounce that vow and perhaps should hold a press conference together so that no party gets blamed as the first mover.
With Stephane Dion a lame duck for the Liberals, this inevitably brings up leadership contender Bob Rae, who is intimately associated with the last deep recession in Ontario in 1990/91. Ontario’s manufacturing base was particularly hard hit between high interest rate policies emanating from the Bank of Canada to stamp out inflation and the fallout of the Canada-US free trade agreement (policies that were praised by my Western profs), both of which amplified the business cycle turn to recession.
Rae also wears the smear of “fiscal profligacy” for his time as Premier. Ontario’s deficit was about $3 billion in 1990/91, around the time that the Rae government came to power. The next year it swelled to just under $11 billion, then hit $12.4 billion in 1992/93 before starting its decline to $11.2 billion in 1993/94, and $10.1 billion in 1994/95. From there it declined steadily up to budget balance in 1999/00, but would have happened much sooner were it not for the Harris tax cuts after 1995.
These deficits, of course, have to be stacked against the economic circumstances of the day. In 1991, real GDP fell by 3.9%, and then grew by about 1% each of the next two years before gaining some strength in 1994. By then the damage was done and the NDP’s days were numbered. Even then, the economy was characterized by “jobless growth” and really did not start firing on all cylinders until 1997.
Ontario’s deficits, while met with such hostility from corporate Ontario, actually made the recession less painful for Ontarians than it would otherwise have been. The deficit was 3.9% of GDP in 1991/92, and 4.3% in 1992/93, before falling to 3.8% in 1993/94 and 3.2% in 1994/95. Just imagine how bad it would have been were those each balanced budgets. And once Ontario’s economy turned around, deficits shrank rather quickly.
On top of the provincial deficit, the feds ran large deficits in this period, as they should have. Those federal deficits were between $30-40 billion range for the early 1990s, around 5% of GDP. So the total stimulus in Ontario, federally and provincially, was 8-9% of GDP. That was a bad recession; this one looming could be worse. And the single most foolish policy governments could make looking forward is trying to balance the budget by cutting back on spending.