Flaherty is gathering his facts for a big selling job

Finance minister must deliver a no-tax-hike, deficit-cutting budget

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by L. IAN MacDONALD
The Gazette, Wednesday, February 3, 2010

Jim Flaherty's math teachers back at Loyola High School in Montreal would be very surprised to see him as CFO of a $250 billion-a-year organization. But he was also a hockey star, with a reputation for driving to the net, and won an athletic scholarship to Princeton. And he had Jesuit logic drilled into him, which has stood him in good stead in the political arena.

So here he is, in the consultations phase leading up to his fifth budget. There is a saying in Ottawa that if you make your budget, you make your year. Flaherty is under an uncommon amount of pressure to get it right because of Stephen Harper's decision to prorogue the House until the eve of the budget on March 4. Never mind the pretext about "recalibrating" the government's agenda, it's all about the budget.

Flaherty's challenge is to stay the course from recession to recovery by holding the line on program spending, and avoiding a tax increase, while eliminating the deficit and returning to a surplus within five years.

Flaherty has already sent out clear messages on the first two points. One, increases in program spending will be limited to the projected 2-3 per cent growth of GDP, as with transfers to the provinces. Two, read his lips, no new taxes.

And three, the deficit is cyclical, not structural, and can be covered by the normal growth in government revenues.

This is a major debating point, but then Flaherty loves a good argument. There is no dark Irish side to him, he is a happy warrior.

Economists, such as the ones he was meeting in Ottawa yesterday, might not altogether share his optimism. Certainly Kevin Page, the parliamentary budget officer, takes a gloomier view. But this just in, he's not minister of finance, Flaherty is, and he gets to make his own case. In other words, that's his story and he's sticking to it.

On his listening tour since the holidays, he's been getting a clear message from stakeholders to make sure the recovery takes hold before Ottawa starts worrying about the deficit. So far, this is a jobless recovery, with employment growth flat even as economic growth resumes. That's a normal function of pent-up demand and productivity growth in a downturn.

Flaherty's main talking point on the deficit for next year is that nearly half of it is covered by the $40 billion of infrastructure stimulus over two years.

To win the argument, all Flaherty has to do is produce a five-year chart with a trend line taking the deficit from $56 billion in the current fiscal year to zero in 2014-15. Let's say, $45 billion in the next fiscal year, $30 billion in fiscal 2011, $15 billion in 2012, $7.5 billion in $2013, and $0 in 2014. They can do that at finance.

Put that chart up among the budget highlights, and the political argument over the deficit is over. At $45 billion, it will be less than 3 per cent of GDP, and it's the best deficit story in the G7. Barack Obama's new budget projects a $1.6-trillion deficit in the U.S., a scary 12 per cent of GDP. When are the Americans going to start worrying about their deficit as much as the rest of the world is worried on their behalf?

Obama, in his State of the Union Address, promised a spending freeze beginning only next year, and only after exempting defence, homeland security, and entitlements.

Flaherty, at least, has a deficit chart heading in the right direction. In a month where Canada aspires to own the podium at the Vancouver Olympics, it clearly owns the narrative on the best fiscal framework in the G7, whose finance ministers and central bankers Flaherty will be hosting this weekend in Iqaluit.

This was his idea, in response to officials thinking about a venue and suggesting, uh, Ottawa, as a change of pace from hotels in Washington, London or Paris. Yes, the Arctic, in February, with dog-sledding as a recreational event.

As his G7 colleagues know, Flaherty has a good story to tell, as he says, of Canada being "a safe harbour in a turbulent world." Canada has the lowest deficit, the lowest debt-to-GDP ratio, and is projected to lead the G7 in recovery. And according to the World Economic Forum, we have the soundest banking system in the world.

As the Nobel-winning economist Paul Krugman puts it in his New York Times column (see below): "We need to learn from those countries that evidently did it right. And leading that list is our neighbour to the north."

Canada might be boring, but in banking and finance, boring is good, boring works.

 
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