Tuesday, August 5, 2008

Another double whammy?

A couple of possible trouble signs for PMS and Slim Jim ™ Flaherty in their hopes to have a balanced budget this year. It was relying entirely on one thing -- oil staying above $130 for the duration. This morning, on the news that Hurricand Edouard just skirted by the oil platforms in the Gulf of Mexico with little to no damage at all, the price of oil dropped below $118 for the first time in three months and a similar drop in natural gas prices. With decreased driving patterns for the foreseeable future, which is at least until oil drops back below $100, the revenue grab may not be as much as planned.

Since both oil refined products and natural gas are charged the GST in Canada, and both are set up so as the tax is charged ad valorem, this means less revenue for the government which is already pinched -- has in fact backed itself into a corner because of not one but two GST cuts. This may have been popular with a large number of people but it is not the way to govern a country. One doesn't govern by polls, one governs by what's right for the people. Clearly, keeping the tax at 7% instead of dropping it to 5% means less policy options. Screwing future governments may also be popular but it's just not smart and it will mean more divisive politicking in Parliament rather than the consensus kind of governing that existed until the Reform Party started winning more than one seat.

The other note is that in the last hour as I write these words, the US Federal Reserve Board has decided to hold the line on interest rates. The rate banks charge each other in the States will stay at 2%. With the drop in energy prices, about 20% in the last couple of weeks, that has resulted in our stock markets getting hammered and the Canadian dollar dropping to about 96 cents.

If people have the feeling things are going to get worse, they are less likely to spend money; and that'll mean even less GST revenue -- the exact opposite of what the Terrible Two believe should happen with a sales tax cut. The lack of spending is what's driving the US into recession and threatening state budgets. Just the other day, Ahnold had to lay off 22,000 state employees in California because revenues from the sales tax and the land transfer tax have tanked with collapsing housing prices.

We are still doing relatively well in Canada, for now, but we are still overreliant on natural resources and their first generation products for the bulk of the economy. High tech may be keeping us from falling over all together, but we can't have Silicon Tundra without the industries that use computers and computer components for at least part of the business: Forestry, steel, auto manufacturing, fishing, agriculture. On none of these have we seen a real strategy for success from the Harperites. It's just let the free market decide, dismantle any remaining co-ops, pump the odd billion or two there into roads, etc. We do need better road infrastructure, particularly in Northern Ontario where most major roads north of 45 are still two lanes -- not expressways. But if there are no jobs at the end of the road to carry goods back, then what's the point?

The odd thing is, there is a point where taxes can be too low and spending then becomes unsustainable. We may have reached that point and may end our eleven year streak of surpluses. What will happen to our dollar then? The Eurozone may be reaching critical mass, too (since a very few countries in Europe run surpluses on a regular basis) but the only reason why they haven't fallen over yet is they're more responsible in their spending than the Americans are, while still maintaining social programs; resulting in a huge appreciation of their common currency against the greenback.

Hmm ... wonder if there's a lesson to be had there.

I've said it before and I'll say it again: It would have been better to give income tax relief to the lower and middle brackets who could use it -- not a huge GST cut to everyone including those who didn't need it.

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3 comments:

jaybird said...

BFC: progressive libloggers should send their complaints to Stephane Dion and the old boys in the back room of the LPC. Let us not forget that the only reason that the Harper budget (with its tax gimmicks and massive corporate tax cut) only passed thanks to the Liberal Party of Canada. The LPC spent the last session either flipping off progressives (support for the extension of Afghan mission) or hiding from votes, essentially not doing their jobs.

I completely agree that Canadians should be worried that Harper's surprise deficit of last week but for liberal MPs (and sorry to say liberal activists) to complain now is a day late and a dollar short.

BlastFurnace said...

Believe me, jaybird, the plug should have been pulled at least a year ago. But maybe Dion knows what he's doing by dragging this thing out to a time of his choosing. I sure hope so.

Unknown said...

It can be said that although many Canadians can be said to think they superior to America and yet be resentful of our neighbors to the south - if not for the high price of petroleum sold to the us - where would Canada be?
It’s certainly not the car industry in Ontario that is funding Canada no or tourism to Canada - with the high price of gas, transportation and jet fuel.
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