Outlook Darkens as Budget Debate Begins

Allow me to indulge myself just this once. Almost exactly one month ago I wrote a post arguing that the Bank of Canada was being too optimistic about our economic prospects in the July Monetary Policy Report .

Today, both the Governor (and Finance Minister Flaherty) conceded to the House of Commons Finance Committee that the outlook is indeed significantly less rosy than they had thought  just one month ago.

I don’t claim any great prescience. It’s just that the dominant macro policy frame that we can build a decent recovery on rising investment and exports as Canadian governments at all levels retrench and as austerity bites in key markets in the US and Europe already in the grips of deleveraging  just doesn’t add up. 

Which is why we need to be having a debate about fiscal policy and the need to shift from austerity here at home to public investment led growth.

Unsurprisingly, both Carney and Flaherty refused to embrace the scenario of a double dip recession, even though that is what is driving the stock market crash and the collapse of US and Canadian bond yields.

I was, however,  glad to hear Carney talk about the need to use low interest rates to support investment rather than increased consumption. It’s just that it will have to come from the public rather than the private side.   A propos of government spending, he said that “smart spending will continue to be important.”  A crack in the door?

And, while reiterating his plan to eliminate the federal deficit through spending cuts, Flaherty left the door very, very slightly open to a change in fiscal policy should the outlook further darken.

“If we were to see the situation globally deteriorate in a dramatic way, we would obviously do what is needed to protect our jobs and economy and families in Canada. We would act in a pragmatic way, as we have done successfully, previously and recently.”

In that context, I commend to his attention the CLC pre 2012 Budget Brief to the  Finance Committee.

Here we underline the deterioration of the economy against the backdrop of a still weak job market, and call for an end to spending cuts and a major new public investment program.

“Given the very weak economic recovery and the damaging effects of planned cuts to federal programs, the brief argues that federal government program spending should be maintained at the current (2011–12) level as a share of the economy, and that the Strategic and Operating Review should be cancelled. We support continuing review of the efficiency of government programs, but any savings should be directed to financing new priorities, such as an improvement in the Guaranteed Income Supplement and Employment Insurance benefits, as well as job creation programs, and a national child care and early learning program.

It is proposed that the federal government should introduce a major, multi-year public investment program to create jobs now, and to promote our environmental and social goals while also boosting private sector investment and productivity. Up-front costs should be funded through an increase in the federal corporate income tax rate to 19.5%.”

 Let the debate begin!

7 comments

  • As long as it isn’t the shovel ready pork barrel politics again. That was criminal of Tony Clements spending 50 million in his riding to get himself re-elected.

  • smart investment public and private indeed. it is the pathway out, and the only pathway out at least the only one I know of. And to have smart investment we need to have a smart approach to developing a jobs strategy to lead that investment. And to get that we need to have input from many stake holders, and we need to have an infrastructure to envelop the stakeholders in this transformation.

    We need a whole lot from input and action from all stakeholders and not just the marketing guys from the tories with their signage and placards brandishing shovel ready pork. (like Jan says)

    A great starting place is a renewal of the sector councils in a strategic sense and a whole lot more linkages between the shopfloors, the classrooms and the policy floors.

    We do have a head start over many countries, but we also have the most to lose given our reliance on exports and the threats facing this eternal economies.

  • that should be ‘facing these external economies’

    However, we do have to get the ideologues to stop the cuts first and I think we are going to have a much more difficult time then the last stimulus, i.e. tax cuts and public sector attacks are ramping up.

  • This is almost off topic, but I wonder if “Corporate income tax” isn’t a misnomer, and one that’s slanted towards the right.
    Corporate taxes are taxes on profits, not income. There’s a big difference. But because we call them “income” taxes, people get the impression that a corporation could be taking in, say, a million dollars, making a profit of fifty grand, but be handed a tax bite of like 150,000 and end up in the hole. That kind of thing can happen to individuals because we really do pay income tax.
    If we paid taxes the way corporations do, you’d have to add up our income, subtract all our expenses for food, shelter, clothes, transportation, loan payments etc. and see what was left–how much we’d been able to save up, add to the bank account, plus maybe the amount we’d spent on entertainment and similar luxuries–and then pay 18% or so on that amount. If we were actually drawing down savings or taking out a loan, we’d subtract that before we calculated the 18%, and if we were in the hole any time in the last few years we could set it against whatever we made this year.
    But people don’t realize that, and even people who know it in theory often don’t internalize it because they think “income tax”, which is why people are often aghast at the idea of taxing corporations during a recession–they feel as if corporate income taxes take poor, recession-hit, loss-laden corporations and then tax them on their gross income. In reality of course if the corporation ain’t making a profit, it ain’t paying any tax no matter what the corporate tax rate is.

  • My personal belief is that the chances of this government taking corporate income tax back up to 19.5% is slightly less than the chance that I’ll see pigs on the wing. They don’t think it’s a solution to any problem that they see as worth solving.

  • Some ideas:

    We need a massive jobs stimulus – maybe 100,000 jobs in the voluntary sector @ $700 a week for 26 weeks. Cost $2 billion.

    We also need something for long-term unemployed Canadians in need of re-training, maybe through expanded EI.

    We can also do something on the tax side ie. raise the working income tax credit to $5000, or lower the first bracket to say 12%.

    If the Govt insists on closing its deficit, then how about additional tax brackets or a surtax instead?
    1. For personal incomes – two more brackets at $250,000 and $500,000 and for corporations – higher rates above $1 million and $5 million in taxable income.
    or
    2. a surtax of 1% across the board and an additional 2% for higher personal and corporate income.

    The feds could fund provincial and local infrastructure or perhaps just transfer monies instead to the provinces and local Govts – ie use the gas tax and transfer payments as a mechanism (it would be very efficient). Or maybe purchase provincial and local debt to give them some fiscal room.

    Finally, there’s the issue of personal debt. The economy won’t move til people with high debt kill off some of that debt. Perhaps we can find a way to unlock money in personal RRSPs to allow Canadians to eliminate their high-interest debt. This would give them a boost.

  • “Perhaps we can find a way to unlock money in personal RRSPs to allow Canadians to eliminate their high-interest debt.”

    I heard that there is a method where you can invest your RRSPs in your own mortgage.

    However I suspect great many of the people with personal debt problems don’t have RRSPs.

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