I blogged recently about the likely pending attack on public service workers.
This battle will, of course, be fought by right wing (and perhaps not so right wing) governments in the name of “fiscal responsibility”, and justified with reference to the imperative need for “exit strategies” from Great Recession deficits and debt accumulation.
The International Monetary Fund staff recently (November 3) put out a report on fiscal sustainability which attracted some media attention and painted a rather grim outlook for the advanced industrial countries, calculating that the primary budget balance will have to be increased by a hefty 8 percentage points of GDP from 2010 levels to bring government debt down to a tolerable 60% of GDP by 2030. http://www.imf.org/external/pubs/ft/spn/2009/spn0925.pdf
Meanwhile, the Parliamentary Budget Officer has reported and expressed concern that the federal government will be running a large structural deficit of $18.9 Billion by 2013-14. http://www2.parl.gc.ca/Sites/PBO-DPB/documents/EFAU_November_2009.pdf
And the TD Bank have issued a major report on “the coming era of fiscal restraint”Â which calculated that trend federal and provincial spending will have to be limited to just 2% if fiscal balance is to be restored by 2015-16 – which implies significant cuts in discretionary spending. http://www.td.com/economics/special/db1009_fiscal.pdf
While some media reports have drawn on this material to suggest a 1990s style fiscal armageddon is once again on the horizon, on close reading all of these reports are quite moderate in tone.
All note that the Canadian fiscal situation is far, far better than that of the other advanced industrial countries due to the surpluses we ran from the mid 1990s courtesy of the deep spending cuts of Martin, Harris and Klein . For example, the IMF calculate (Table 7)Â that the total government structural deficit in Canada in 2010 will be just 1% of GDP compared to a G20 advanced country average of 3.4%. The required fiscal adjustment for Canada 2010 to 2020 is an estimated 3.1% of GDP compared to the G20 advanced country average of 8.1%. Trimming spending or raising taxes by 3.1% of GDP is not trivial, but it falls well short of the 10.4% of GDP fiscal consolidation Canadians endured in the 1990s.
The TD report similarly notes that gross and net debt to GDP ratios in Canada are currently very modest compared to other countries and compared to the early to mid 1990s.
The estimated deficit and debt trajectories embodied in these reports are reasonable enough on the surface, but one can question the need for a relatively quick return to budget balance as per the conventional wisdom.Â Unlike previous recessions, interest rates are likely to remain quite low for some time,Â especially if there is no significant resumption of growth. This will forestall the pernicious high interest rate/high deficit interaction which got us into such trouble in the early 1990s .Â Given low interest rates, we can and shouldÂ go ahead with public expenditures which are significant investments in our productive potential and thus raise the future tax base. To my mind that includesÂ all levels of education, from early learning to post secondary education, training, and a lot of public infrastructure and green investments.
Further, the fact that the structural deficit is estimated to be modest means it could be easily addressed by modest tax increases rather than by major spending cuts.Â Simply reversing the two point cut to the GST (which costs about $12 Billion per year) all but eliminates any federal structural deficit.Â Provinces also reduced revenue to GDP ratios in the recent past (something which is much less noted than a modest uptick in program spending.)
I entirely take on board Hugh Mackenzie’s important argument that we need an adult discussion about taxes which recognizes that decent levels of public services and social programs have to be paid for from a broad tax base, including consumption taxes.Â Â http://www.thestar.com/comment/article/715565 If we want Scandinavian type welfare states, we will have to pay Scandinavian level taxes. That said,Â as I have argued elsewhere,Â we could and should gain useful amounts of revenue, to the tune of several billions of dollars,Â by levying higher rates of income tax on the very, very affluent. http://www.policyalternatives.ca/documents/National_Office_Pubs/2007/Why_Charity_Isnt_Enough.pdf True, the very rich are few in number, but they do have a high and rising share of all personal income.Â Corporations could also pay more – though I incline to the argument that we should redirect higher corporate tax revenues into more effective ways of supporting private investment rather than into general revenues.
In short, there is no fiscal crisis. To the extent that we have a fiscal problem, it can be squarely addressed on the tax front.
But one caveat. The fiscal outlook for a few provinces, notably Ontario, is grim. Ontario is today running a deficit of almost $20 Billion, equal to two thirds of the combined all Canada provincial deficit, and almost as high as the federal deficit as a share of GDP. (3.2 vs 3.7%) Ontario’s revenue base has been particularly hard hit by the crisis, and it won’t bounce back quickly given the massive shrinkage ofÂ industrial capacity.Â Arguably, enhanced fiscal support from Ottawa will have to be part of any Ontario fiscal solution.