Prescriptions for the 2009 Federal Budget

Posted in Politics by cimmetry on January 26, 2009

The Government of Canada will table its 2009 budget on Tuesday, and expectations of it are enormous. It will be seen as a political sign-post of the survival of Prime Minister Stephen Harper’s minority Conservative government. The budget will also be read as a blueprint of Canada’s economic future.

A deficit in the order of $64 billion over two years has already been announced, erasing approximately half of the federal debt repayments made during the past decade. Most of the borrowing is expected to fund a massive economic stimulus package, but will it be worth the risk of a return to structural deficits?

In some quarters, there is a belief that budgetary stimulus will contribute little to the recovery of the Canadian economy. Andrew Coyne notes that the economic crisis was created by global rather than national forces; therefore, Canada’s recovery will depend largely on that of the United States and our other trading partners. He is probably right, but while domestic stimulus spending will not drive the recovery, it can help to keep the country afloat.

Pointing at the Bank of Canada’s Monetary Policy Report Update forecast of a painful but short recession followed by a return to commodity driven growth in 2010, Jeffrey Simpson argues that stimulus spending will arrive too late and leave the country in a weaker position. But the Bank paints a highly optimistic picture. Even if it proves correct, it the benefits are unlikely to touch all regions and sectors of the Canadian economy evenly.

In any case, a budget without a stimulus package is politically unpalatable. So what measures would be most likely to help Canadians weather the storm, and mitigate the risk of systemic deficit spending?

Support for vulnerable families. Jobs are disappearing and Canadian families need immediate support that will help them to cover basic living expenses in the difficult months ahead. The government must make access to EI easy and quick, and the budget should provide for a temporary benefit increase. These dollars will be spent in Canada and will reduce the number of defaults on mortgages and rent, and provide an important safety net.

Retraining and education upgrades. Many jobs lost during this downturn will not be coming back. Rather than backstop jobs in dying industries, the government should invest in Canadians seeking to retrain or upgrade their education.

Intelligent stimulus. There is no question that infrastructure spending will be an important part of the budget. However, projects that are selected must contribute to strengthening our future. This includes improving the quality and affordability of our housing, infrastructure that is good for the environment, and research, development and technology investments that will be an advantage when the recession ends.

Long-term sustainability. Canadians have worked hard to cut the Federal debt by some $100 billion over the past ten years. The next 3-5 years could see this undone. Stimulus measures must be temporary and the budget must provide a strategy to repay projected deficits once the recovery is underway. The Globe and Mail is apt in suggesting that specific debt-to-GDP and spending-to-GDP anchors be established in the budget. I would also welcome a scheduled future increase in the GST in which new revenue is funnelled exclusively to debt repayment.

In addition, if the budget includes any permanent income tax cuts, they should be offset by a future increase in consumption taxes. Such a structural change to our tax system should improve productivity and better prepare us for the next downturn.