Record deficit for Canada?

The 2009/10 federal deficit is now projected to hit $50 billion, the largest ever in nominal terms. The media seem to be obsessed with the nominal number, even though Canada’s economy has more than doubled in nominal terms since we saw the previous record of $39 billion in 1992/93.

If that deficit number holds (and it most surely will not given that we are only two months into the fiscal year), relative to GDP, it is just over 3.3%. On that basis, it is still quite low relative to the “dark days” of deficits invoked by the media. According to the fiscal reference tables, deficits as a share of GDP were in excess of 3.3% were run in EVERY year in the two decades between 1975/76 and 1995/96, peaking at 8.3% in 1984/85.

So media, chill out, please – if anything, the feds need to be doing more to support demand in the economy right now, and the historical experience suggests there is lots of room to do more. And Opposition parties need to stop playing silly politics with the deficit numbers, while arguing (rightly, in this aspect) for the government to do more via unemployment insurance. That analysis may make for good talking points but does not add up unless one also wants to raise taxes, and no one seems to want to do that. For example, here are the NDP and Liberal responses, as quoted from the Star:

“This is a shocking number,” said Liberal MP John McCallum. “It is higher than I think anybody had predicted. This is by far the highest deficit ever in Canadian history – under their watch.”

… Prime Minister Stephen Harper is facing increasing heat as the country’s economic problems worsen, with Liberal Leader Michael Ignatieff threatening to topple the Conservative minority and force an election if the Tories continue to refuse to bring in major improvements to employment insurance during the recession.

Yesterday, the Liberals continued to voice their demands for reforms to EI that would make it easier for the rising army of jobless to access benefits.

While no one is calling for an election, Harper appears headed for an unpredictable clash over this issue with the opposition parties.

“We are pushing it hard,” said McCallum, the Liberal finance critic. “We shall see what happens. In a minority government, one never knows.”

… NDP Leader Jack Layton took aim at the Conservatives for creating “the largest deficit we have seen in the history of Canada.”

“What do they have to show for it? There have been 400,000 people thrown out of work. There should at least be some results for the steps that they have taken, but there are not any,” Layton said.

While it feels unusual for me to defend the Tories, I give them credit for letting that deficit grow rather than the alternative of cutting $17 billion in federal expenditures to keep to the budget’s projection. The opposition parties cannot have it both ways, wanting both more spending through EI and a lower deficit.

11 comments

  • According to the fiscal reference tables, deficits as a share of GDP were in excess of 3.3% were run in EVERY year in the two decades between 1975/76 and 1995/96, peaking at 8.3% in 1984/85.

    The big difference is that those deficits paid for the roll out of some of our social safety net and publicly funded healthcare. What is this deficit buying us?

  • Yah I have to agree. The deficit panic is silly and the libs attack strategy equally silly. To my mind the big story here is that the Cons ran an election on a balanced budget promise with rosy projections, then did their budget on rosy projections and then came out with a 50 billion dollar deficit.

    The 50 billion only matters because it is a metric of how bad they got the numbers intentionally or unintentionally. Lucky for them they have the BOCs rosy projections to save from the charge of intentionally cooking the numbers.

    The other big canard is that the EI program is one of the costs driving the budget deficit. If they had not raided the fund last year there would be plenty of cash for a rather long recession. But having raided the fund and then given it away on an ineffective GST cut the finance minister goes on TV and argues its the EI costs that are driving the magnitude of the deficit. And not one peep out of the media.

    The memory hole gets bigger everyday.

    Robert you make a good point.

  • In this case I don’t think you should apologize for defending the Tories. They are doing the right thing. You can still call for a change of government on other grounds, just not on the deficit.

    It wasn’t that long ago that a whole bunch of us were on the hook for defending a coalition between Dion and Layton on the grounds that Harper wasn’t doing enough to stimulate the economy. Unlike Ignatieff and Layton, I agree with what I said last December, and won’t turn on a dime. Really, what will friends and relatives say when I start contradicting things I said over Xmas dinner? I have my own credibility to think of. If friends get into the habit of ignoring your political opinions, you may as well stop reading newspapers.

  • My question is, how much of this deficit is basically just declines in govt income and increases in traditional social trasnfers versus new spending in the form of stimulus?

    There is a big difference between the two.

    One is a result of bad projections and a huge lack of effort in attacking the economic crisis, which creates more declines in government income and increased payouts for traditional social transfers.

    The second is a deficit from stimulus spending in a strategic manor to create economic infrastructure to combat the first. We all know that the tories have done pretty much nothing with their hands off, market based solutions. And this is exactly what one gets, huge declines in incomes and increases in transfers.

    I am totally confused as to how one can actually confuse defending the tories for this deficit. The reason we have this huge increase is their lack of leadership and ability in doing anything to combat the crisis.

    It won’t be long before we eclipse all time deficits in real terms. It is going to take a whole lot of spending to get this post-neoliberal- capitalist/socialism for the rich/ regressive greening of the economy, economic system going again.

    Come on bloggers get with it would you. Apples are indeed red in colour, and not orange.

    Policy with some kind of stimulus based strategic focus has still not appeared on the tory radar yet.

    MAybe more forestry workers sitting in MPs office’s will help, I enjoyed hearing about that.

    paul

  • Not to mention if they bring down the government over EI they will have egg on their face if they have to increase the deficit. I can’t figure the logic of this line of attack save for the opposition parties got giddy with the sentence ‘conservatives and largest deficit in history.’

    Sorry day when the NDP and Libs are echoing the Fraser institute.

  • I would be much happier if the opposition called for a $70b deficit which added another $20b in stimulus. The left should be calling for a larger deficit, not a smaller one. What if the Tories said “twist my rubber arm” and tabled a fiscal update that carved $17b out of the deficit as Marc mentioned? Then they called on the opposition to support their $33b deficit. If that happened I would vote Tory on the basis of merit. I mean, it’s not like I could vote Liberal or NDP to get what I want.

  • Agreed, although I thought both had already jumped the shark when they ran on balanced budget platforms in the last election.

  • I was on Dale Goldhawk’s noontime radio program today discussing this issue.

    Of course, I share Marc’s view that the deficit number should be put into historical context. Another interesting comparator is Obama’s proposed budget, which envisions a deficit worth 13% of American GDP this fiscal year.

    However, the jump from $34 billion to over $50 billion seems strange. According to Finance Canada, a 1% reduction in GDP reduces the annual budget balance by about $3 billion. The economy is obviously worse today than Budget 2009 projected, but it has not contracted enough to explain $16 billion of additional deficit.

    The other explanation cited by Flaherty is support for auto companies. This sum of approximately $10 billion bridges most of the gap between Budget 2009 and Flaherty’s new number. However, government loans (or equity purchases) would not normally count as deficit spending. Indeed, Budget 2009 did not count them as such.

    Perhaps Finance Canada has since decided that it will never recover money lent to the auto companies and that this loss should be booked in the current fiscal year. Whether or not this accounting judgement is correct, the timing is questionable.

    I suspect that the government chose to let slip a $50-billion deficit yesterday to suggest that the cupboard is bare. This message deflects mounting opposition calls for more stimulus spending, especially to improve Employment Insurance.

    The Liberals in particular have been objecting to large deficits, proposing more spending and rejecting tax increases. The spectre of a $50-billion deficit draws attention to this contradiction.

    I cannot blame the opposition parties for taking a shot at an easy target. But I hope that, going forward, they keep up the pressure for more spending on Employment Insurance and other needed public programs instead of focusing on the short-term budget balance.

  • I think a better attack by the opposition would focus on the mismanagement rather than the size of the deficit. Layton spotlighted the Tory tax cut last year which again compounds the situation.

    At the end of the day mismanagement has go to be the highlight of this deficit. The mistrust angle should also get more focus, how can we trust anything with Harper when a little more than 4 months ago they were touting this downturn as minor and forecast with such arrogance. This on top of substantive tax cuts.

    If we actually had a proactive government, one with a plan and spending towards a goal, then I would say yes crank up the spending.

    However, given the track record of
    – holding a gun to worker’s heads on behalf of industry for concessions,
    – riding the recessionary winds on the backs of the unemployed
    – filling the coffers of the finance industry,
    – having good parts of the manufacturing sector- auto, steel, forestry,mining and resources industries laying idle or shuttered,
    – allowing companies to make cost savings adjustments on the backs of pensioners
    – pulling legislation for women’s pay

    – for all that we have a bill for $50 billion

    (and that most likely does not include the Obama led rescue of the auto sector that has led to our share of the auto sector drop from 20% to 15 % of a much smaller work force.)

    If the best the opposition can muster is to be critical of the size then we are in for some dangerous waters.

    What the opposition needs is to lay out alternatives and focus on a new vision for change and if the price of progress is expensive so be it, but start laying out a differential path and use this opportunity to contrast rather than take a shot at the easy target.

    Phrack any 8th grader could have cooked up the liberal strategy to day. To me that means there is a vacuum, otherwise why such a dumb assed response!?

    pt

  • I think the spirit of Layton’s comments and the comments of many here are appropriate.

    Let’s distinguish between good spending and bad. Not spending for the sake of spending.

    Come on. The Conservative stimulus plan builds backyard decks and is targeted based on their polling numbers. There is no strategy to invest in green jobs and innovation enhancing infrastructure.

    The change is discourse this early is frightening. Because we’re going to have a big deficit with very little actual investment to show for it and then years of austerity when we should be tackling some serious problems.

    Good point on the magnitude of the deficits and the need for more stimulus. But shouldn’t the deficit spending ALSO be “smart” spending.

    Brendan

  • >The big difference is that those deficits paid for the roll out of some of our social safety net and publicly funded healthcare.

    Ironically, the 75/76 to 86/87 deficit operating balances totaled just under -$67B, while the 87/88 to 95/96 surplus operating balances totalled just under $75.5B (ie. a net surplus). But the public debt charges added $174B during the former time range, and almost $372B during the latter, to the accumulated federal deficit (debt). Prior to 75/76, the operating balances were mostly surpluses and the debt had only risen to about $28.5B.

    The 75-86 $67B overspending may very well have been worth every dollar; the question is whether it was worth that plus every other dollar currently in the federal debt. What else could have been funded with $550B+ (several years’ worth of spending)? But it does also remain to be shown that the spending then was not partly a response to the economy of the times, as is today’s spending.

    Regardless, the important point isn’t “why” the debt exists; the important point is how it came to be so large. Debt restrains our ability to respond to the current crisis. If there were no significant federal debt at this moment, would we be concerned with the fraction of GDP that the projected coming deficit represents? Our finances were badly managed from 97/98 to 07/08: that was the one window of opportunity in the past 35 years to cut the size of the debt. At this point it looks like we will hand the cost of two periods of overspending over to some latter generation to pay. How are they to deal with their economic crisis?

    And we are vulnerable to increases in the interest rates which must be offered to fund the public debt. A repeat of the worst recent example (81/82) would be another -$30B.

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