Monday, March 16, 2009

Bank official: Deficit to be bigger than forecast. BFS

Slim Jim ™ Flaherty has predicted that the federal budget deficits for fiscal years 2010 and 2011 are going to be $33.7 billion and $29.8 billion, respectively. An economic analyst at Toronto Dominion says the numbers for Canada are actually going to be far worse: $39.2 billion and $42.3 billion -- in other words, the fiscal situation will worsen, not improve, over the next two years. While Canada's economy is much larger than it was during the Mulroney years and therefore better able to handle a shock of that size, that's not the point.

It can look bad when one predicts a worst case scenario that's too rosy, as the Liberals did for years, but it does lead also to make a zero based budget that is based on prudent and independent forecasts, so that when the numbers do come in better than expected the excess revenues can go down to pay market debt, thus lowering interest payments and in turn reducing taxes.

But at least that way, you put the cart and the horse in their proper order. If the horse faces the cart -- that is, you make up your own rosy predictions that are not based on realities on the ground, and you also ignore the advice of those who know the realities on the ground, namely the Big Six Banks and the Caisse Dejarsdins credit union -- you're going to run yourself into the ground sooner or later. That's true for private businesses who eventually face bankruptcy, but it's also true for the government who then has to borrow money on the "full faith and credit" of the citizens at large.

This has become a pattern of right wing governments everywhere: Claiming fiscal prudence, they are financial disasters. Claiming surpluses are "excess revenues" they cut taxes so much they can't afford to pay for the daily expenses. And it's going to get even worse in the next couple of years even if the economy begins to turn around.

Consider the GST cut -- the money flowing from the value added tax before Team Harper started their slash and burn on the revenue side, essentially made sure Old Age Security and its supplements for low income people was self-financing. With the first wave of the baby boom starting to collect OAS in 2011, the money required to pay the entitlements will shoot up, big time, and there will not be the money to pay for it. The CPP and RRQ are self-financing, for now -- but there's a chance they might have to be bailed out like Social Security in the States, at which point we're going to have to make some choices. Meanwhile, those who actually have private pensions get a tax break -- now being able to shelter triple what they could before from income taxes.

Seniors should get a tax break for all the hard work they did, but there should also be an expectation that their less fortunate brothers and sisters who live only on OAS get an equal offer in the supplement. Since the tax savings amounts to $450, that means those on supplement (whose incomes are usually so low they often don't pay taxes to begin with) should get an increase in that every year. What do they get, however? Indexed to inflation and there hasn't been an increase since October, and because of dropping prices won't be until July at the earliest. And with the cut in GST revenues, already down because of an ill-timed cut before lower sales figures, there sure isn't room to offer an extra $37.50 per month to the poorest especially when they need it now!

With lower revenues across the board, and with a general consensus on social welfare policies we're going to have to make some choices? Do we need a military? Can we get by without agricultural subsidies? Are we going to have to charge co-payments each time we see a physician or specialist (as most of our competitors do, even the more socialistic ones)? This is something we need to think about.

Surpluses, or at least keeping deficits below the growth rate in the economy, gives one policy options. Running deficits above that water mark ensure we start sinking again. After more than a decade in progress, Canada is making the same mistakes as the rest of the industrial world, and it does not bode well for us as a nation to do that. Appropriate stimulus is needed, but throwing money into a toilet is not.

This is not conservatism we're experiencing. It's radicalism, and it's reckless. And while revenues have gone down, they've increased spending by twenty five percent. This is insanity.

I am also not the least bit surprised we're in the mess we're in. Right-wing governments tend to screw things up like that. Then to make it worse and slap it in our collective faces, they say they run deficits not just because they don't matter, but it's "what Jesus would do."

Give me a break.

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Anonymous said...

Big surprise there BF, Don Drummond a Liberal, shilling for the Liberals.

BlastFurnace said...

It's just a matter of time before some of the more conservative bankers raise hackles. This isn't conservatism as I understand it.

Anonymous said...

And just which parties were screaming for stimulus spending prior to the budget?

The opposition got what it asked for.

BlastFurnace said...

Sure, but it's what kind of stimulus ... and the Cons were spending money like crazy before the crisis started. That's the problem, in my opinion. I don't like wasteful spending whether it's done by Liberals or by Conservatives.

Anonymous said...

So your saying tax cuts are wasteful spending?

BlastFurnace said...

No ... it's the kind of tax cut. I wouldn't have cut the GST until the debt to GDP ratio had gotten to a more reasonable level -- say 25%. I would have relied on income tax cuts instead, not the nickel and dime stuff with "non-refundable credits" that amount to peanuts, but real cuts in the rates, starting with the lowest brackets.

I think we all want fiscal discipline -- it's just there are different definitions of what that involves. Spending like crazy when all the warning signs that a crisis is coming, is not my idea of responsibility. And that's all I have to say about it.