A test of Harper's deficit nerve TheStar.com - Opinion - A test of Harper's deficit nerve
November 26, 2008
Thomas Walkom
Two cheers for Prime Minister Stephen Harper. He understands the severity of the global economic slump. He knows what has to be done. Now he just has to deliver.
Harper eloquently articulated his conversion from what-me-worry free-marketeer to alarmed Keynesian last weekend at a meeting of Pacific Rim nations in Peru.
That's when the Prime Minister admitted that he was surprised by the speed of the downturn, alarmed by the prospect of deflation and prepared to take unprecedented fiscal action – either by raising federal spending or cutting taxes.
But Harper's real epiphany seems to have come a week earlier at the Washington summit of the so-called G20 nations.
He heard there from other leaders, and from International Monetary Fund managing director Dominique Strauss-Kahn, just how bad the situation is.
As Strauss-Kahn explained to reporters later, the IMF now sees global deflation – a situation where prices of all commodities begin to spiral downward – as the real danger.
That's because deflation can turn a recession into depression. Businesses, fearful that their products won't be worth as much later, put off expansion plans while consumers, confident that prices will drop, postpone spending.
The IMF chieftain's advice to leaders was to pump massive amounts of cash into their respective economies, either through new spending or new tax cuts. Economists call this fiscal stimulus. Normal people call it putting money into people's pockets.
Strauss-Kahn even provided a target. Countries with low inflation (like Canada), he said, should provide fiscal stimulus equal to about 2 per cent of their national economies.
In Canada's case, that works out to a whopping $31 billion.
Note that if the federal government doesn't do anything next year, it's likely to run a so-called passive deficit of between $3.9 billion and $14 billion, according to parliamentary budget officer Kevin Page – just because the economy is slowing down.
But the IMF is calling for $31 billion in active fiscal measures on top of that. Which would translate into a total federal deficit next year of about $35 to $45 billion.
Strauss-Kahn also pointed out, correctly, that the fastest way to boost the international economy is for governments to direct this fiscal stimulus to low-income people and strengthen social safety nets for the poor and unemployed. That's because such monies are usually spent quickly.
He noted that infrastructure spending on projects like subways may be useful but will take longer to have any effect.
And he said that if countries worked together to meet this target, the combined effect would be to boost world economic growth by two percentage points and reverse the downward spiral.
Finance Minister Jim Flaherty, who seems a more reluctant convert to the interventionist views of the late John Maynard Keynes, says that the government's past tax cuts should be counted toward that IMF target.
It's a nice try. But in the harsh world of reality, the past is past. What the G20 said – and what Harper says he accepts – is that Ottawa has to pump new money into the economy if Canada is to do its bit. And it must do so soon.
Harper's allies in the business press (and his own party) will go ballistic if he does what needs to be done and orders Flaherty to post a $35 billion deficit next year. We shall see how much nerve this Prime Minister has.
Toronto Star
So what will all the cons do when lil' Stevie starts racking up huge deficits?:lol:
November 26, 2008
Thomas Walkom
Two cheers for Prime Minister Stephen Harper. He understands the severity of the global economic slump. He knows what has to be done. Now he just has to deliver.
Harper eloquently articulated his conversion from what-me-worry free-marketeer to alarmed Keynesian last weekend at a meeting of Pacific Rim nations in Peru.
That's when the Prime Minister admitted that he was surprised by the speed of the downturn, alarmed by the prospect of deflation and prepared to take unprecedented fiscal action – either by raising federal spending or cutting taxes.
But Harper's real epiphany seems to have come a week earlier at the Washington summit of the so-called G20 nations.
He heard there from other leaders, and from International Monetary Fund managing director Dominique Strauss-Kahn, just how bad the situation is.
As Strauss-Kahn explained to reporters later, the IMF now sees global deflation – a situation where prices of all commodities begin to spiral downward – as the real danger.
That's because deflation can turn a recession into depression. Businesses, fearful that their products won't be worth as much later, put off expansion plans while consumers, confident that prices will drop, postpone spending.
The IMF chieftain's advice to leaders was to pump massive amounts of cash into their respective economies, either through new spending or new tax cuts. Economists call this fiscal stimulus. Normal people call it putting money into people's pockets.
Strauss-Kahn even provided a target. Countries with low inflation (like Canada), he said, should provide fiscal stimulus equal to about 2 per cent of their national economies.
In Canada's case, that works out to a whopping $31 billion.
Note that if the federal government doesn't do anything next year, it's likely to run a so-called passive deficit of between $3.9 billion and $14 billion, according to parliamentary budget officer Kevin Page – just because the economy is slowing down.
But the IMF is calling for $31 billion in active fiscal measures on top of that. Which would translate into a total federal deficit next year of about $35 to $45 billion.
Strauss-Kahn also pointed out, correctly, that the fastest way to boost the international economy is for governments to direct this fiscal stimulus to low-income people and strengthen social safety nets for the poor and unemployed. That's because such monies are usually spent quickly.
He noted that infrastructure spending on projects like subways may be useful but will take longer to have any effect.
And he said that if countries worked together to meet this target, the combined effect would be to boost world economic growth by two percentage points and reverse the downward spiral.
Finance Minister Jim Flaherty, who seems a more reluctant convert to the interventionist views of the late John Maynard Keynes, says that the government's past tax cuts should be counted toward that IMF target.
It's a nice try. But in the harsh world of reality, the past is past. What the G20 said – and what Harper says he accepts – is that Ottawa has to pump new money into the economy if Canada is to do its bit. And it must do so soon.
Harper's allies in the business press (and his own party) will go ballistic if he does what needs to be done and orders Flaherty to post a $35 billion deficit next year. We shall see how much nerve this Prime Minister has.
Toronto Star
So what will all the cons do when lil' Stevie starts racking up huge deficits?:lol: