Kevin Page on the new normal - Macleans.ca

Kevin Page on the new normal

What our in-house guest expert had to say about the 2014 budget

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Chris Wattie/Reuters

Chris Wattie/Reuters

In 2006, Finance Minister Jim Flaherty inherited a fiscal surplus and an economy operating on all cylinders—strong growth and a relatively low unemployment rate. If budget 2014 turns out as a planned, we will find ourselves in a similar situation. Ten years later we could find ourselves back in surplus with an economy operating near its potential.

It has been a difficult road for the Government of Canada. There were a number of obstacles. Some of these obstacles were largely forced upon the Canadian economy, including the 2008 world financial crisis. Others, it can be argued, were self-created. Deep tax cuts to the GST and corporate income taxes and the launch of a large number of tax expenditures have come back to haunt the government. To get back to balance before the next election in 2015, the government must cut program spending while the economy continues to operate below potential.

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Budget 2014 has been carefully crafted. Minister Flaherty has stayed his course. His planned commitment to get the government back to balance is still intact. There are lots of small measures to help a sluggish economy: to help raise our employment rate; to support growth; and to help Canadian families, including those that face difficult challenges. The fiscal impact of these new measures has been offset by additional fiscal restraint, largely on the backs of public servants and delayed military procurement, and from re-allocation of spending. It is the new normal: try to do a lot with a little.

I wish the government well in achieving its balanced budget objectives. I agree with Minister Flaherty that fiscal discipline has its benefits. Lower debt relative to the size of the economy will give our country fiscal room to manoeuvre. We needed that fiscal room to manoeuvre in 2009 when our Canadian economy was in recession. Fiscal stimulus helped when we needed it.

As with any budget, there is opportunity to debate strategy. Setting a fiscal target of balanced budget in 2015 is a political choice. Fiscal balance is given a higher priority over the short term than additional support for economic growth. By the government’s own estimate, about $19 billion of annual savings in 2015-16 have been implemented since the 2010 budget. This represents more than one per cent of GDP. It is a significant amount of savings for an economy that is operating well below its potential. While some of these saving have been redirected to new government programs, most have gone to reduce a small structural deficit that the government created earlier in its mandate.

What if the government redirected all the savings since budget 2010 to nurture the recovery and support longer-term reforms? Economic growth in Canada has trended down since 2010. We had less than two per cent growth in 2013. It is very difficult to lower the unemployment rate with growth this weak. Our employment rate, the level of employment divided by population, is down two percentage points from pre-recession levels. If we had a similar employment rate, the level of employment would be some 500,000 jobs more. Weak investment and exports have been unfortunate hallmarks of the Canadian recovery, compared to earlier experiences in the 1990s and 1980s. What if further investments were made to training, research and development, and infrastructure? Did we lose an opportunity? There is a price to fiscal discipline while the economy is operating below its potential.

Budget 2014 is an austerity budget. Program spending will decline in 2014-15. This is a rare event. Some tough political choices have been made. We are now headed for planning surpluses in 2015 and beyond. We have come full circle. There will be room to manoeuvre, at least at the federal level. Next year, 2015, is going to be very interesting. There will be a budget and then an election. Next year’s budget will lay claim to fiscal surpluses. There will be many claims on that surplus—new programs to boost productivity, deal with aging demographics, address increasing gaps in income inequality and on the environment. Let the policy debate begin. There is no shortage of longer-term challenges.

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