Forecasters everywhere—the private sector, the IMF, the Bank of Canada—are revising downwards their projections for GDP growth over the next year or so. There’s concern about the looming U.S. “fiscal cliff,” and there’s little sign that the eurozone crisis will be settled anytime soon. And Finance Minister Jim Flaherty is responding by… doing not very much at all, actually.
But then again, why should he?
Downward revisions are not a reason to panic: no forecast is ever exactly right, and if the original forecast was unbiased, you’d expect downward revisions roughly half the time. And the revisions in GDP growth forecasts are minor: 2.0 per cent in 2013 instead of 2.4 per cent. Neither number is consistent with roaring growth, but neither are they consistent with a recession. These revisions are not strong enough to force a change in anyone’s preferred policy stance. And the government’s current policy stance is broadly correct as far as business cycle policy goes. The recession ended more than three years ago; the time for using infrastructure construction as a fiscal stimulus is long past.
The structural deficit introduced by the GST cut had to be addressed at some point. The 2011 budget would have been too early: the recovery was still fragile. In February, I was of the opinion that a small amount of fiscal contraction was appropriate for the 2012 budget: private-sector employment had recovered its pre-recession peak, and it was time to get federal government’s house in order in time for the next recession. And that’s what we got, although in the form of modest spending cuts (the 2012 budget had nothing on Paul Martin’s 1995 austerity program) and not a reversal of the GST reduction.
The main effect of slower-than-previously-expected growth is less income and expenditure, which means lower tax revenue. This would be bad news if Canada’s deficit and debt were at the levels they were 20 years ago, but—thanks to Paul Martin and Jean Chrétien—Jim Flaherty has a much thicker cushion to work with. Bond markets will not be upset by a slight delay in the path to a balanced budget, so there isn’t any pressing need for further fiscal tightening
It makes sense to change your policy stance when the facts change. But when the changes are small, there’s not much reason to modify your views. Whatever you thought the government was doing correctly or incorrectly in March, there’s no reason you should change your mind in November.