Tories’ economic projections all smoke and mirrors

In the fall of 2008, private sector economists were forecasting that the Canadian economy was already in a recession due to the financial crisis. Prime Minister Stephen Harper and his finance minister, the late Jim Flaherty, ignored these warnings and told Canadians there was nothing to worry about. The prime minister even advised Canadians that it was a good time to buy stocks, given the fall in equity prices.

The November 2008 Economic and Fiscal Update forecast annual surpluses as far as the eye could see. Two months later this forecast was thrown into the trash. In response to the crisis Harper and Flaherty quickly discarded their Conservative orthodoxy and became temporary Keynesians. They introduced the largest stimulus budget ever, in an effort to increase economic activity. After that, deficits were recorded for seven consecutive years until, in this year’s April budget, Finance Minister Joe Oliver declared the government would finally register a surplus in 2015-16.

The elimination of the deficit never had anything to do with good economic policy. The Conservative government’s sole economic policy objective has always been the elimination of the deficit. This is the only criterion it uses to judge its economic record; nothing else has mattered — not stronger economic growth, not increased job creation, not improved productivity, not saving the environment, not greater tax efficiency and tax fairness, and not strengthening federal-provincial and Aboriginal relations. The primary objective of the Harper government has always been to diminish the role of the federal government in economic policy. Eliminating the deficit no matter how small was critical to achieving that objective.

The April budget was built on smoke and mirrors: overly optimistic economic growth and oil price assumptions; cutting the contingency reserve by two-thirds; selling shares in GM at fire sale prices; raiding EI revenues; and even booking “savings” from unilateral changes to federal employees’ sick leave benefits. Without these tricks the government could not have paid for the income tax cuts it announced last October and still have balanced the budget.

But now the smoke is disappearing and cracks are appearing in the mirrors. And yet, just as in 2008, the Conservative government seems to be saying there’s nothing to worry about.

Statistics Canada has reported that economic growth has declined for four months in a row (January to April). Private sector economists have now revised down their forecasts of real GDP growth for 2015 by about 0.6 per cent. Earlier this month, the IMF also cut its forecast for economic growth in Canada for 2015 from 2.2 per cent to just 1.5 per cent. Shortly thereafter the Bank of Canada cut its forecast for economic growth for this year to 1 per cent, while declaring the economy had contracted in the second quarter. That means Canada was in a “technical” recession in the first six months of the year.

These numbers differ significantly from those forecast in last April’s budget: a surplus of $1.4 billion for 2015-16 based on real GDP growth of 2.0 per cent and nominal gross domestic product growth of 1.6 per cent in 2015.

The finance department estimates that a reduction in real economic growth of 1.0 per cent would result in deterioration in the budget balance of close to $4 billion in 2015-16. This would wipe out the projected surplus of $1.4 billion along with the government’s $1-billion contingency reserve, resulting in a deficit of $1.6 billion.

Not that that’s a crisis. In fact, a deficit of $1 billion (less than 0.1 per cent of GDP) is more or less irrelevant. But the Conservatives have made deficit elimination a key election issue.

And so Oliver refuses to admit that budget balance has been threatened. He wants to wait for more information, he says — the same argument that he used to delay the 2015 budget to late April. By now, however, Oliver should have a very good idea about the final fiscal outcome for 2014-15. And although Parliament has recessed for the summer, there is absolutely no reason why the finance minister should not meet with his private sector economists who advise him on the economy. He could then provide Canadians with an updated economic and fiscal forecast in early September.

Even by its own extremely narrow standard of economic success, the government seems to have fallen short. Canadians deserve to know by how much before they go to the polls.

Original Article
Source: thestar.com/
Author:  C. Scott Clark and Peter DeVries