Our reality check comes tomorrow

Harper and Flaherty must come clean with Canadians about our real fiscal situation

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by L. IAN MacDONALD
The Gazette, Wednesday, November 26, 2008

With tomorrow's economic statement, Ottawa will formally acknowledge that we are entering "the classic circumstances under which budgetary deficits are essential."

Who said that? Well, John Maynard Keynes, of course, or words to the effect that governments should balance their books and pay down debt in good times, and run cyclical deficits to stimulate the economy in bad times.

Actually, it was Stephen Harper who said that, in just those words, at last weekend's summit of Asia-Pacific countries in Peru. He was quick to add: "I say this with some reluctance."

That was very decent of him. It is not known whether he blushed. One of the reasons Harper left the Progressive Conservative Party in the late 1980s was to join Preston Manning's Reform crusade against deficit spending, structural deficits that over a quarter century had seen the national debt increase by 1,100 per cent under Pierre Trudeau and eventually double again under Brian Mulroney, who managed to achieve an operating surplus but was thwarted by the compound interest on the debt.

As recently as the last election campaign, which was only last month, Harper vowed there were no circumstances under which he would witness or permit a return to deficit spending.

For that matter, his opponents also swore up and down that there were no circumstances under which a deficit was either forseeable or permissible.

And this, even as the sky was falling, as global stock markets crashed, a liquidity and credit crisis ensued, and Washington nationalized Wall St., while unemployment soared and consumer spending plummeted in the United States, which buys one-third of everything we produce in this country.

Harper, Stéphane Dion and Jack Layton all had their heads in the sand for one reason and one reason alone - ever since Canada balanced its budget in 1997, deficits have been an unacceptable political outcome. Even a discussion was deemed to be unacceptable in the middle of an election campaign.

For those five weeks, Harper's agenda was captured by his campaign officials, and together they came very close to blowing an election on their preferred ballot question of the economy. Of course, they didn't see the perfect storm that arrived in the middle of the campaign; nobody did. But Harper's initial response, that the fundamentals of the Canadian economy were strong, was as disconnected from reality as John McCain when he made the same comment in the middle of the stock market crash. Apart from his empathy deficit, Harper also commented that there were "great buying opportunities" in the market, violating a PM's golden rules of never commenting on the stock market or exchange rates. He was fortunate not have a stake driven through his heart.

He is also fortunate now that he surrounded by very able officials, notably the clerk of the Privy Council, Kevin Lynch, a former deputy minster of finance and international financial official with a doctorate in economics from McMaster University, not to mention Bank of Canada Governor Mark Carney, a former investment banker with Goldman Sachs and a rising star of international finance. The team at Finance, led by Jim Flaherty and his deputy, Rob Wright, isn't too shabby, either.

Tomorrow comes the reality check. The surplus is disappearing all on its own, without any help from the stimulative spending needed to ride out the storm. It's no mystery - corporate tax receipts are plunging, as are royalties from the oil patch. Personal tax receipts are also going to fall, and GST receipts have already fallen another $6 billion with the second cut of the consumer sales tax from six to five per cent. The Tories promised to do this within five years, but rushed ahead a year ago. Harper took $24 billion out of his own pocket over four years, at a time when he could have used it. Good politics, bad policy. The Tories have also increased program spending by a reckless seven per cent, at twice the growth rate of the economy. Through all that, they managed to pay down another $41 billion on the national debt. Oh, for the good times, now gone.

What are we looking at here? We are, as Harper said in Lima last weekend, entering "a period we have not seen in the memory of most people alive today."

That being the case, Harper has to do what he didn't do in the campaign - level with the Canadian people about the size of the storm we are facing. This is a time for grown-ups, not playing silly games about whether we can run a deficit. Of course we can. It's the prime minister's role to explain why, and to lead the country through this. His job depends on it.

 
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