John Ivison: Now is exactly the time to clean up the country’s balance sheets

The gods preserve us from leaders who are, in Winston Churchill’s words, “adamant for drift and solid for fluidity.” All it has taken are a few days of market turbulence and Canada’s opposition parties are in a panic, urging the government to abandon its economic course to balance the federal budget.

Peggy Nash, the NDP finance critic, has called for another round of stimulus spending. Bob Rae, the interim Liberal leader, also gave the impression he would like to see the Conservatives splurge again. “We can’t just have a government that cuts. We have to have a government that builds,” he said.

While there are good reasons for Mr. Rae to be allergic to public spending cuts, given his experience in Ontario in the mid-’90s, his Treasury Board critic, John McCallum, a former Royal Bank economist, has no such excuses for his comment that “it makes no sense” to cut spending now.

When most informed people agree that a preponderance of debt is the cause of a potential double-dip, spending cuts look eminently sensible. Writing in the Financial Times, Harvard economics professor Ken Rogoff said that governments should be cleaning up their balance sheets, rather than indulging in more temporary stimulus. “By far the main problem is the huge overhang of debt that creates headwinds to faster normalization of post-crisis growth,” he said.

The NDP and Liberals have been rattled by Tory plans to shake up the public service. The government says 600 jobs will be lost this year, mainly among contract employees, in part because stimulus spending is being wound down. But this should be put into the context of the 32,000 jobs that have been added to the public service under the Conservatives. There were 282,352 public servants in 2011 — and that doesn’t include the Canadian Forces, RCMP or security services. The $4-billion in cuts the opposition parties are contesting are a rounding error in the grand scheme of things.

In reality, the government may need to make deeper cuts if it wants to achieve its target of balanced budgets by 2014/15. In the event the economy avoids a double-dip recession and grows at the tepid pace predicted in the spring, government revenues should outpace total expenses (programs plus public debt charges). The last round of the controversial corporate tax cuts that hit the headlines during the spring election will dampen anticipated income but the Conservatives are set to reap a $10-billion bonanza in extra EI premiums over the next five years — a result of crafty legislative changes that require the EI account to be in balance over time, thus requiring an increase in rates.

This gradually improving situation will mean that budgetary balance comes into sight by 2014/15, according to Finance Canada projections. The Parliamentary Budget Office thinks the government is too optimistic and believes that further policy action to increase revenues and/or reduce spending will be needed once the economy returns to its potential. Yet even by its numbers, the deficit falls to 0.4% of GDP within four years – if, and it is admittedly a big if, things don’t get dramatically worse.

Speaking in Brasilia Tuesday, Prime Minister Stephen Harper called for calm amid the volatility and pointed out the importance of wealth creation, such as deepening trade ties with countries like Brazil. “To date, this doesn’t change our overall assessment. Nothwithstanding the fragility of the economy and the headwinds that are there, we believe that a gradual recovery can continue,” he said.

Plummeting commodity prices — oil has fallen by 27% since April — and weakening demand south of the border may force the Bank of Canada to revise downward its 2.8% growth prediction and cut, rather than increase, interest rates. Mr. Harper may yet have to display the kind of pragmatism he showed in the 2008/09 recession by attempting to restore confidence through selective government spending.

But the situation is still developing. Any government that turned from its course on the basis of stock market turmoil and opposition nervousness would damage its hard-won reputation for fiscal competence and leave it at the mercy of every wind.

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Source: National Post