In its October 2014 World Economic Outlook (WEO), the International Monetary Fund reduced its forecast for global economic growth to 3.3 per cent for 2014, 0.4 points lower than the April 2014 WEO forecast. The global growth projection for 2015 was lowered to 3.8 per cent. China accounts for one-third of this growth; take China out of the equation and the growth forecast for the global economy would be less than 2.5 per cent.
The IMF downgrade — just the latest sliding forecast in a long run of them since 2010 — is a harsh wakeup call for G20 leaders meeting next month in Australia. The recovery isn’t recovering. The word of the hour is ‘risk’.
“Downside risks have increased since the spring,” says the latest IMF report. “Short-term risks include a worsening of geopolitical tensions and a reversal of recent risks spread and volatility compression in financial markets. Medium-term risks include stagnation and low potential growth in advanced economies and a decline in potential growth in emerging markets”.
The eurozone is on the verge of its third recession since 2008. The Chinese economy is dramatically slowing, as are the economies of Brazil and India. Russia is about to tumble into a recession and growth in developing economies is stalling.
Only the United States economy has shown signs of recovery, but even the U.S. is operating well below its potential and is in no shape to drive the global economy on its own. Time to face facts: The recession never really ended, the global economy never properly recovered and — as the IMF predicted — the world is now entering a period of “mediocre” or “stagnant” growth.
Stock prices have plummeted, risks premiums are rising in bond markets and exchange rates are becoming misaligned. Oil prices have fallen by almost 25 per cent since June in response to oversupply, slower demand growth for oil and OPEC politics. No one knows for sure how long this situation might continue.
According to all important economic indicators, the Canadian economy hasn’t been doing well for the past five years. The Alberta oilpatch is now facing lower world prices and significant uncertainty. We can no longer rely on good old Alberta to make up the shortfall in economic growth elsewhere in the country. For Canada, the IMF is forecasting growth of 2.3 per cent for 2014 and 2.4 per cent for 2015. The unemployment rate is forecast to stick around 7 per cent. These are not good numbers — and even they might be too optimistic.
Still, Prime Minister Stephen Harper and Finance Minister Joe Oliver seem strangely chipper.
It’s a lesson politicians have to learn over and over again, boiled down to an aphorism by the garrulous Clinton fixer James Carville: “It’s the economy, stupid.” When the economy is ailing and there’s an election on the horizon, all other political problems — short of war — get kicked to the curb. So you’d expect to see all three main political parties emphasizing growth and job creation.
And you’d be wrong. Sunny optimism seems to be the mood of the moment. The Conservative party and the NDP have begun already to compete to buy voters with their own money.
The Harper government has announced that it will double the child fitness tax credit and make it tax refundable. Families will be able to take advantage of this change when they file their 2014 returns. The Conservatives have promised also to extend the fitness tax credit to adults and to double the allowable annual contribution to the Tax Free Savings Account.
There are rumors that the government will expand the Universal Canadian Child Benefit (UCCB) to include children ages 6 to 12. This could double the annual cost of the benefit — from $2.9 billion to almost $6 billion — while contributing little to covering day care expenses for the average Canadian family. (The UCCB, by the way, is taxable.)
We already know, of course, that the Harper government is committed to introducing income-splitting for families with children under the age of eighteen — despite overwhelming evidence that it would benefit only a small number of high-income families, and despite the late Jim Flaherty’s acknowledgement that it makes no sense politically or fiscally. It would cost the federal government $2.5 billion annually.
Expanding the fitness tax credit, boosting the UCCB and introducing income-splitting would together cost the federal treasury a whopping $5.5 billion per year — burning up most of the projected surpluses years in advance, while contributing exactly nothing to economic growth and job creation.
To make matters worse, income-splitting also would reduce provincial revenues by $1.7 billion annually. Ontario alone would lose $1 billion at a time when it is struggling to fix its fiscal problems. The federal government loves to lecture the provinces on the need to get their fiscal houses in order … even as it introduces policies that make that work far harder. Perhaps the provinces should think about re-opening their federal-provincial tax treaties.
And then there’s the NDP. Last week, Thomas Mulcair made a big media splash with his pitch for a $5 billion federal-provincial childcare initiative, to be funded 60 per cent federal and 40 per cent provincial. The NDP claim their proposal would pay for itself, and with appropriate labour market responses some of the costs may be offset. But that would take years and no one knows how much offset there might be. All we know for sure is that this program would absorb a significant part of the projected surpluses— assuming the provinces can find a way to pay for their end.
This is what happens when economic reality refuses to conform to a party’s campaign talking points: The Conservatives and New Democrats are ready to do battle over the surplus, but they’re talking about the wrong things. The Canadian economy can’t afford tax cuts right now. A smart government wouldn’t even mention them. A smart government would focus on making critical investments that could strengthen economic growth, productivity and job creation. The best way to make childcare affordable is to put in place policies that support growth and create jobs.
The Liberal party appears to be taking a different approach. In an interview on Radio Canada this past Sunday, Liberal leader Justin Trudeau said that a Liberal government would give priority to infrastructure investment, education and research over tax relief. What would he do with the tax cuts Mr. Oliver will announce in the upcoming fiscal update ‘mini-budget’? He hasn’t said for certain.
Mr. Harper and Mr. Oliver are about to waste the modest surpluses achieved through cutting government programs and services to provide tax breaks to a small number of Canadians. These tax breaks will contribute nothing to economic growth and job creation.
The fall economic and fiscal update is expected soon — perhaps as early as this week. The Harper government will set out new economic and fiscal projections for the current fiscal year and the next five. How accurate will these projections be, given the dramatic turn in the risk forecast we’ve seen in just the last few weeks?
In the fall of 2008, Mr. Flaherty presented a fiscal update which vowed there would be no recession and there would be surpluses forever. Prime Minister Harper, meanwhile, assured us all that falling stock prices were nothing to get vexed about and he had advised his mother that it was a “good time to buy”.
So what do you think now, Mr. Harper? Is this a good time to buy? Or is this a good time to have a realistic conversation about what you can, and can’t, promise in 2015?
Original Article
Source: ipolitics.ca/
Author: Scott Clark and Peter DeVries
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