Fiscal Crisis?

I blogged recently about the likely pending attack on public service workers.

http://www.progressive-economics.ca/2009/11/10/public-sector-workers-the-recessions-next-victims/

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”  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)  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.  Unlike previous recessions, interest rates are likely to remain quite low for some time,  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 .  Given low interest rates, we can and should  go ahead with public expenditures which are significant investments in our productive potential and thus raise the future tax base. To my mind that includes  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.  Simply reversing the two point cut to the GST (which costs about $12 Billion per year) all but eliminates any federal structural deficit.  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.   http://www.thestar.com/comment/article/715565 If we want Scandinavian type welfare states, we will have to pay Scandinavian level taxes. That said,  as I have argued elsewhere,  we could and should gain useful amounts of revenue, to the tune of several billions of dollars,  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.  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 of  industrial capacity.  Arguably, enhanced fiscal support from Ottawa will have to be part of any Ontario fiscal solution.

5 comments

  • At the risk of paraphrasing Lenin, the only effective response to “fiscal crisis” austerity is to turn it into a political crisis. The economic-stimulus-and-growth paradigm we’ve been living with for sixty-odd years is essentially a perpetual rearmament motion machine. Do the math. Taking the world as a whole, what proportion of budget deficits are off-set by military spending? Rough guess: more than 100%. It used to be that war debt was a more or less intuitively cynical practice of statecraft. NSC-68, adopted by the US in 1950, turned it into an an exercise in “social science”. The perpetual boom by militarization strategy was the brainchild of New Deal Leon Keyserling who was NOT a Keynesian. He was a flim-flam man and a narcissist. General Dwight D. Eisenhower had a speech prepared to deliver in Cleveland on September 23, 1952 detailing the arms-for-inflationary-growth swindle but Richard Nixon preempted him with his Checkers speech. Yeah… I know this probably sounds like it should be an ALL CAPS rant but please come over to EconoSpeak (the link on my signature) and have a look at the documentation. It’s not a conspiracy, just something polite people don’t talk about.

  • Many forces coming to bear in Canada and a lot has to do with the feds mishandling of many things.

    However- I do agree with you Andrew as much as it looks like we are facing deficits and such- lets be clear of a few things here- this has all been created by the tories.

    1) we had massive tax cuts by the tories not so long ago- that reduced revenues

    2) we had a reduction in the corporate tax rates- that
    reduced revenues

    3) we had a very large recession that cut into the jugular of manufacturing, high value adding, export oriented sectors- that hit government revenues hard at the Fed, Ontario and Quebec levels. Further incited by a high dollar strategy by Harper’s hands off approach.

    4) we have had no targeted national initiatives that seek a way forward through this economic morass, and as I think Jim S. stated, dragging along the bottom is the best Harper and our Corporate leaders(?) (mainly from Brazil- the movie- not the country) can deliver.

    Where are the green jobs- where is the business investment- where is a real recovery coming from.

    An easy example- create a huge reforestation program that goes right across the country and helps preserve the small towns that were hard hit by the forestry decline. The short, medium and long term benefits would more than offset the outlays.

    So in reality where far away from the land of Harper- the deficit we hear about is quite a construct that he helped put in place due to cuts. The litmus test has got to be acceptable international levels of debt to GDP ratios.

    We have so much room to make headway in the realms of innovation and the green economy. Whatever country chooses right now, to take this opportunity to seed these industries and build the asset capacity will have a head start on bringing to bear the requirements of a thriving future oriented economy that will redefine the terrain on what a wealthy economy is defined as. It no longer will be just mainly measured in dollar denominations.

    The race is on but instead of buidling towards these goals where a thriving public sector is a requirement- we have a leadership that would actually spend most of its time creating artificial deficits and then slashing and burning part of the requirements required to meet this future head on. It is not a remedy- just ask the Americans who are falling apart after 8 years of such leadership.

    paul

  • Ontario’s latest provincial deficit figure is $24.7 billion, even larger than Andrew suggests.

    I suspect that federal Equalization transfers to Ontario’s government will indeed increase, helping to reduce this deficit in future years. (However, now that total Equalization is capped at the national rate of economic growth, more for Ontario will likely mean less for other Equalization-receiving provinces.)

    But the Ontario government does not deserve too much sympathy. It is squandering political capital on controversial, multi-billion-dollar tax reforms that will not actually increase provincial revenues. Worse, it is foregoing revenue through deep and unnecessary corporate tax cuts.

  • Andrew’s caveat — Ontario — is the news story out of Canada. Not its deficit but its predicament: manufacturing job loss, people sliding down the income scale, small towns losing major employers, and property values dropping. Politically I have no sense of how this will play out at the federal level. In 1988 a strong Ontario economy brought Mulroney back to power, and free trade to Canada. Will a weak Ontario economy sink the Conservatives? It would be nice to think so, but I do not see the scenario playing out yet. It seems imperative for the NDP to write up its story on what needs to be done, and get out and push it all over the province.

  • The good news is that there is not much more insanity that can follow. The theoretical minimum for CIT is 0% and I suspect it is politically well before that point. I suppose we could do more progressive tax cuts and raise regressive taxes. But at some point the supply side will come undone when it fails to deliver the goods.

    The bad news is of course we are a good ten years away from that truth becoming self evident. I wonder what will happen when the kids find out that almost everyone in authority lied to them for most of their lives? Let us hope unlike the class of 68 they have a plan.

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