N.B.: Revising the forecast, not the policy stance

The downward change was minor, writes Stephen Gordon

by Stephen Gordon

(Adrian Wyld/CP)

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.




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N.B.: Revising the forecast, not the policy stance

  1. This is a disgrace. They’re doing the Mulroney thing…constantly making excuses for why they can’t balance the budget.
    If they don’t sharpen up they’ll be awaiting the same fate.

    • Um….Mulroney was one of our most sucessful PMs. Two massive majorities.

      And he eliminated the Operating deficit, straightened out the GST [which Harper screwed up] and signed NAFTA.

      Don’t blame Mulroney for the mess Harp has made of things.

      • Mr. “on the take” was a huge disgrace. Aside from taking a $300,000 bribe, his ego-driven constitutional bungling created the Bloc and Reform parties. He also left behind a record deficit.

        What benefit has NAFTA actually brought Canada? Anemic GDP growth, deteriorating living standards, worst job prospects since the Great Depression, big trade deficits? Yeah the prosperity is just pouring in…

        • He wasn’t any of those things…..don’t be daft.

          And wIthout NAFTA you’d have been selling pencils on corners

          • How’s the view from outer space?

          • The very fact you’d still call it ‘outer space’ shows how out of date you are.

            So here’s a ‘Warning Will Robinson’….it’s the 21st century……!

          • Says the person blindly pimping 19th century economic ideology…

          • See, this is your problem. You live in the 19th century mentally…..so you assume everyone else does too.

            I haven’t the slightest interest in the old economy….or any kind of ideology…..political or economic. I’m strictly a 21st century, knowledge economy type…..and until you’re interested in discussing directions and goals in that…..don’t bother posting to me.

  2. Well, all right then. As long as we don’t get some third-rate WSJ hack
    ( John Fund … currently a second-rate FIne Fox Fellow, I believe )
    telling us we’re a third world country and having all the media mavens
    do the vapours and swoons bit, I can live with Irish JIm fumbling around
    in the till with one hand and doing a slow finger-walk toward the EI fund
    with the other.

  3. What do you get when you combine long time MLB back catcher Carlton, Peg Bundy’s husband, and the barfly/mailman on Cheers?

    • Not a Rhodes scholar?

      • No……..um…… a…… Fisk, Al, Cliff :)

        • Very good – but I`m a little slow – was going with not overly bright male…lol

  4. Interesting how there is strong US private sector job growth (which has stalled in Canada,) yet all the problems are being blamed on the upcoming US fiscal cliff. You’d think it would affect the US before Canada…

    The reality is we have our own “made in Canada” recession going on, due to failed policies of the Harper Government. His 40-year no-money-down mortgage deregulation is the basis of the housing bubble and record levels of personal debt. The bubble is now deflating which is putting a damper on GDP growth.

    Harper’s bitumen dollar (which is overvalued by 25%) has killed hundreds of thousands of good-paying jobs and turned a $26B trade surplus (current account) into a $50B trade deficit. According to the “twin deficits” theory, big budget deficits follow big trade deficits as they did with the bankrupt US PIIGS…

    Last there are Harper’s austerity measures. Budget Officer Kevin Page factored them into his original growth forecast of 1.9% and 1.6% for 2012-13. Mark Carney did not. He originally forecast 2.4% and 2.4%, which he has since revised down to 2.1% and 2.3%.

    If Page is right, the deficit will grow even larger than what Flaherty is claiming now. If the country goes into recession, it will be back up in the $50B range… (Harper’s “economic action plan” hard at work…)

  5. If the income generating portion of the federal government is being restricted by the decrease in all types of tax revenues caused by the continued slowdown in the global economy, resulting in fewer exports and lower resource prices, then a responsible opposition, and a responsible media, and a responsible Kevin Page should be shouting from the rooftops for further cuts to government spending.

    • Actually Kevin Page forecast that Harper’s current austerity measures are dampening GDP growth. Carney originally forecast 2.4% and 2.4% for 2012-13. Page, who factored in the austerity measures, forecast 1.9% and 1.6%.

      Looks like Page is right. If his 1.6% number is right, the deficit will rise by more than $7B Flaherty is now saying.

      As Keynes said, the boom, not the slump, is the time for austerity. Austerity measures in a slump kill GDP growth and jobs in a vicious cycle and a country’s ability to manage its debt.

      Many people confuse household economics with macroeconomics. Corrupt politicians and economists who want to bankrupt centrist government (“starve the beast”) promote this ignorance.

      • If you agree with Page that ” the boom is the time for austerity ” and if the boom years were the first part of this century, then try to remember what austerity measures, what government spending cutbacks, were being proposed by Page, by yourself, or by the NDP, during that time.

        See that`s the problem—-I would agree that the Liberal and Conservative governments of that time should have been spending less, but all I heard from the NDP was that when there was surplus budget monies they should not be used to pay down our debt—but should go into social services.

        Whether it be the NDP, or Page or yourself, I cannot take seriously those who use their personal stats and percentages, not to offer contribute practical solutions but just to further their own agenda.
        No wonder Flaherty leaves Ottawa to make Updates—there is nobody left there to do credible critiques.

        • The reason Flaherty is deep in the hole is because he brought in $44.4B/yr in reckless and useless tax cuts that did nothing for the economy. (That’s the figure from his 2009 budget.)

          According to the Keynesian system, one runs small surpluses during the recovery phase of the business cycle and small deficits during a recession. The Liberal surpluses were too large and just allowed Harper to waste all the money they saved.

          Of course, one of the reasons why we have such large deficits is because of 25 years of continuous tax cuts. We rank #9 among of 31 High Income OECD countries in tax revenues and #23 in public social spending.

          A country that has one of the strongest economies going right now is Sweden. It has the highest tax revenues and ranks #2 in social spending.

          Greece, BTW, ranks #8 in tax revenues and #12 in social spending…

        • “then try to remember what austerity measures, what government spending cutbacks, were being proposed by Page”

          Sure thing, right after you tell us what spending proposals Page has ever made.

          • Well, since he is now complaining about the lack of spending in certain departments, I thought he might branch into spending proposals.

          • Didn’t think so.

            Now, why don’t you tell us what “lack of spending” he’s complaining about.

          • Page comes off as a whiner—he would fit in with many of you.

          • Yeah, when Harper promised he’d create a Parliamentary Budget Office (modeled after the US CBO,) he didn’t promise he’d cooperate with it. Promises made. Promises kept…

          • Right, that what I thought. Page’s only complaints or proposals regarding cuts or spending are figments of your febrile imagination.
            Any reality-based comments you’d like to make on the topic?

          • He’s not complaining about the cuts in spending in certain departments, he’s complaining about the government refusing to say what’s been cut.

            Saying “The government should tell the people what they’re cutting” is different from saying “The government shouldn’t be cutting”.

        • Andrew, you have become our own Stephen Colbert. You have absolutely mastered him. Good work!

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