In defence of Harper's budget
A number of readers have asked me for my take on the recent federal budget. The short answer is: too much spending. But it's what's needed to win the next election.
And losing that election to the opposition would make this budget look positively Thatcherite compared to what Ignatieff would serve up -- especially if he allied with his coalition partners.
As I argue in the National Post, we actually don't need any government stimulus at all. Falling oil prices alone are an $80 billion annual stimulus to Canada's economy, and falling interest rates even moreso. More to the point, almost all of the proposed spending will kick in once Canada is out of the recession -- just five months from now.
This budget isn't about the economy. It's about politics -- specifically, about taking away the public rationale for the opposition coalition (mission accomplished); delaying an imminent vote of non-confidence (mission accomplished); and pre-empting and co-opting the Liberals' preferred campaign message, that tough times call for government stimulus (mission accomplished). There is only one group of people who are more upset with the spending in this budget than critical conservatives are -- and that group is the Ignatieff Liberals and their chorus in the media. Their desired narrative -- a cold, heartless Harper ignoring the plight of the downtrodden -- has no factual basis anymore. There's very little room to Harper's left, and Ignatieff surely won't try to take his party to Harper's right.
That's what this budget was about: shaping the battlefield for the next election, while doing as little damage to the economy as possible. Enough preamble; here's my Op-Ed. (Note: the sentences in blue were edited out of the published edition for space reasons, but I've put them back in here because they're interesting, and because the subsequent sentence doesn't quite flow without them.)
The recession is halfway over. That might sound surprising to those who are bracing for the return of the Great Depression, but it’s true: The consensus of private sector economists, the Bank of Canada and the Finance Department is that Canada’s economy entered a downturn in the last quarter of 2008 and we’ll be out of it in the third quarter of this year.
Despite media hysterics, this economic downturn is much milder than the two recessions of the mid-1980s or the one in the early-1990s. The consensus forecast is that unemployment will tick up a bit more this year, to 7.5%. That’s painful to those people who will lose their jobs, typically in industries that were declining even before the recession. But compare that to the roaring 1990s, when unemployment never dipped below 8%, or the last three recessions, when unemployment exceeded 11%. Ten years ago, this recession would have been called a boom. And it’s already correcting itself: The lower price of oil on its own will be an $80-billion stimulus to Canada’s economy this year. So by the time the spending in last week’s federal budget kicks in, the economy will already be growing again.
Unfortunately, this growing economy will be saddled with extra government debt. Even without additional spending, temporarily shrinking tax revenues and increasing payments such as Employment Insurance would have caused the federal ledger to tip into deficit. Throw in the stimulus contained in last week’s budget — $29-billion this year and $22-billion next year, plus an additional $9-billion in the next two years in tax cuts — and what would have been a modest deficit is now a big one. As a result, some conservative activists are grumbling.
That grumbling is a good thing. With all three opposition parties and much of the media to the left of the government, conservative dissenters provide at least some counterweight to those demanding even more spending. And, from a purely partisan perspective, conservative critics provide political cover to the government in the next election, reassuring centrist voters that Stephen Harper isn’t “extremist” in his austerity.
But when you dig through the budget’s details, there are a number of reasons that true conservatives need not be too disappointed.
The first is that the government’s stimulus package is much smaller than in other countries, especially the United States. This year’s government stimulus spending is 1.9% of GDP, compared to 2.9% in the U.S. Next year, Canada’s stimulus falls to 1.4% of GDP, while the U.S. plans to keep going full tilt, at 2.8% of GDP. And that’s on top of the enormous U.S. bank bailout, a crisis that has not afflicted Canada.
Another reason for optimism is that the Canadian budget is based on a “worst case scenario” — that the economy will peform 1.5% worse than economists now predict it will. That pessimism accounts for $15-billion of the deficits. So if things merely go as economists expect, the actual deficit will be significantly smaller. Even in a worst case scenario, Canada will still have the lowest debt-to-GDP ratio amongst all the G7 countries when we’re done.
Another reason why the deficit is large is because of the $9-billion in tax cuts. Canada already has a lower corporate tax rate than the United States. By 2012, ours will be lower still — and lower than that of every other G7 nation. And that’s just on the corporate side. Personal income taxes are going down too, and the GST cuts continue to pour $12-billion a year back into consumers’ pockets.
But perhaps the most important reason why conservatives shouldn’t be too depressed by this budget is that it doesn’t create any new, permanent government programs that will continue to drain the treasury for generations to come. There are no new “product lines,” such as a national daycare or pharmacare program that would be difficult to uproot. The bulk of the spending is in tangible one-off programs, such as rebuilding roads and bridges and low-cost housing.
True conservatives balk at things such as government subsidized housing or loan guarantees to the auto sector. But Canada’s right has already tried a purist conservative party — it was called the Reform party and it kept losing elections. Party members voted to inter it and build a broader electoral coalition, making the strategic choice to moderate policy in return for a chance at power.
At the end of the day, that is the context of Stephen Harper’s decision. With a minority Parliament, and opposition parties threatening an election in the near future, what budget would be the most likely to keep the Conservatives in office now, provide maximum advantage in the next election and do the best for the economy?
This budget fails the test of conservative ideological purity. But 10 years of the Reform party experiment has taught Conservatives that holding the Liberals at bay, while making modest incremental gains, is the right decision.
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