Monday, October 11, 2010

So Mr. Flaherty, where do we go from here?

On Tuesday the Minister of Finance, Jim Flaherty, will release the government's fall economic and fiscal update. We're being told to expect something straightforward and containing no mini-policy announcements, say like the one that nearly lost the government the confidence of the House in 2008. So far, so good.

What we can expect to hear is that the government's finances are poor and that the deficit has grown. However, the Minister will reaffirm the government's commitment to balancing the books by around 2015. The question to ask Mr. Flaherty is "how?"

The government's strategy has rested on three things: the rollback of stimulus; stronger tax revenue through growth in the economy; and cuts in government spending. Let's consider this a moment.

Stimulus spending will end, likely before the next budget - though the Minister has a left a small window open that this timetable may change depending on how soft the global recovery turns out to be. However, the end of stimulus will not restore the nation's financial health, it will mainly stem the bleeding from the state coffers.

Ok, so how about the projected growth in government revenue as the economy begins to expand? The challenge here is that the government's projections assume a recovery and pace of economic growth similar to that which occurred after previous recessions. Unfortunately, this does not seem likely.

Our major trading partner is continuing to falter and in fact could fall back into recession. Other OECD countries (Germany is an exception) are faring poorly, and the spectre of sovereign defaults in the European Union continues to loom. While their growth and resilience is impressive, emerging markets like China and India cannot compensate for this loss of economic output in the West (never mind the fact that the West has been the biggest consumer of emerging market exports).

So, if the end of stimulus is akin to us no longer digging a hole, and the prospects for "normal" growth must be tempered, where does that leave us? Spending, that's where.

The government will need to look at spending if it is serious about balancing the books. Let's not forget that the Conservatives spent heavily before the recession (defence, Quebec) and they have cut taxes - corporate, personal and consumption in the form of the GST. These steps have seriously limited their maneuverability - and that of any other party aspiring to power.

We will not hear much tomorrow about "the plan." However, we can now count on entering a period of trial balloons and ground softening to prepare us for an austerity budget.


1 comment:

  1. What ever they will announce will fail!! Why do yo think I claim that? I am more intelligent than others ? Don't think so!! Simply because it always failed. Governement after governement are doing the same thing resulting in mroe deficits, less services, more dumping in the provinces backyard.

    Why worry so much about the deficit? Off course when you do not have any creativity, or vision, or a single clue about managing finances you apply the same old recipies that never worked just to make people beleive you are doing something for the deficit.

    I would bet anything that the Minister of Finance, Jim Flaherty, will use the most stupid and non-sense sentence we can hear "we need to make sure we do not leave a heritage of deficit to the next generations...bla bla bla".

    Tell me what Jim Flaherty will announce tomorrow that will be different than all his predecessors did and failed? Nothing, it will be all the same. So if it failed before why will it succeed this time?

    If you saw the movie Awakenings there are an awesome exchange between Dr. Sayer (Robyn Williams) and Dr. Sullivan (John Christopher Jones):

    Dr. Sayer
    Dr. Sullivan
    I'm sorry?
    Dr. Sayer
    It was an immense project. I was trying to extract 1 decigram of myelin from 4 tons of earthworms.
    Dr. Sullivan
    Dr. Sayer
    Yes, I was on that project for 5 years. I was the only one who believed in it. Everyone else said it couldn't be done.
    Dr. Kaufman
    It can't.
    Dr. Sayer
    I know that now. I proved it.

    I see that conversation happening between a citizen and a Minister of Finance!!

    Sylvain Plourde


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