Saturday, December 20, 2008

Back into deficit -- it didn't have to be this way

In his year-end television interviews, Stephen Harper indicated that the deficit this year -- and he actually admitted there would be a deficit -- would be in the neighbourhood of 30 billion.

He is damned from two fronts -- his conservative core who will accuse him of abandoning Laffler for Keynes, and his progressive opponents who will note that he wouldn't be in this position if he had not cut the GST from 7 percent.

There is no question that Canada is coming from a far better position than the States. But that's because of tough steps that the federal and provincial governments took during the 1990s -- massive cuts in the public service, reorganizing transfer payment and cost sharing and only then when the debt to GDP ratio had shrunk to a much more managable level were income tax cuts provided.

With the last year of surplus, which ended on March 31 of this year, we essentially were back where we were when Trudeau finally left office -- adjusted for population growth and inflation. While that certainly puts us in a better position to run a deficit from, since our debt is way less than half of what the American burden is, it would have been even better if we had had a surplus that could be counted on for a rainy day such as this so the deficit would not have been as large.

It was that prudence that helped Canada weather the recession that came about after the 9/11 attacks. We were able to fund security improvements because we had the money to spend. What did the Americans do? Borrow money from the very people who funded the attacks, rogue elements in the Saudi royal family. And they still hold the West hostage by being able to set the price of oil at their whim. Market conditions have driven down the price but that's only temporary -- when things get better, the prices will skyrocket and America will be back to where this all started.

Remember, had the tax situation been frozen where it was in 2001 when Clinton left office after actually running a couple of surpluses, the US would be close to debt free right now and able to afford all the bailouts it is engineering to prevent a worldwide disaster. Instead, Bush decided to give a huge tax cut and ran his country back into deficit and that was before 9/11. When you keep borrowing money like that, soon you become a banana republic, not even able to pay the interest on the debt.

I just find it so odd, even funny, that neo-conservatives in any country keep talking about smaller government, that government is the problem etc. Yet when they're done, the government is way bigger and the funds available for real priorities just petty cash if there is any of that at all. Am I the only one wondering how program spending has increased by about 25% over the last three years when population plus inflation has been less than half of that? And on top of that, they cut taxes to drain themselves even more.

Income tax cuts would have been better, getting money back into the private sector; that would have raised GST monies so the overall result would be revenue neutrality. More important, if I was the one running the show, I would not have cut the GST until the debt to GDP ratio was below 25%, a level at which we no longer had to float bonds on the foreign market and we could take care of ourselves.

In short, Harper got us into this mess -- or rather back into the mess that progressives tried to get us out of. He owes an explanation when Parliament resumes on how he's going to get us out now without screwing us over.

Otherwise, the coalition option remains a viable one.

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