The Conservatives for years vowed that they would eliminate the deficit of $55.6 billion recorded in 2009-10 by 2015-16. And the government has been aggressively cutting government spending on programs and services since 2010. Despite recent declines in oil prices, the federal deficit will be eliminated in 2015-16 — possibly even a year earlier.
On the surface it looks like good fiscal stewardship, but the surface hides a few unsettling facts: Those program cuts weren’t necessary and the deficit could have been eliminated earlier. And it all comes back to that bad, bad idea.
In 2006, the Conservative government inherited a structural surplus of $13.8 billion, just under one per cent of GDP. This represented a major correction from the $39.0 billion deficit (5.5 per cent of GDP) Ottawa was carrying in 1992-93. The debt-to-GDP ratio had dropped steadily from a high of 67.1 per cent in 1995-96 to 28.2 per cent in 2008-09. Program spending had fallen to a record low of 11.9 per cent of GDP in 1999-00, down from a high of 17.0 per cent in 1992-93.
In other words, the heavy lifting was done already. Never before in Canada had a newly elected government inherited a sustainable fiscal structure — a structure that had produced 11 years of surpluses and a declining debt burden. The fiscal situation could not have been better for the Conservatives.
In fact, from a fiscal perspective there was nothing the Conservative government really had to do. Public sector employment had been cut. The size of the government had been reduced dramatically. Program spending was at an all-time low. Canada’s largest income tax cut ever had been introduced in 2000 and the tax burden on Canadians had fallen by 1.5 per cent of GDP. The debt burden was at a post-war low and was expected to decline further.
The Liberal government had turned out to be the best ‘fiscal conservative government’ in Canadian federal history. And that was a problem for Stephen Harper.
He couldn’t stand the thought that historians would see Jean Chretien and Paul Martin as better fiscal managers than him. He couldn’t accept what was being handed to him on a golden platter by a Liberal government.
He had to prove his own budget bona fides. For that he would have to find a ‘fiscal problem’ that he could fix with tough spending cuts and public service layoffs — even if he had to manufacture one. If he could do this, he could make ‘sound fiscal management’ his political brand. All he’d need would be a good ad campaign.
And that, of course, is exactly what happened.
The first step was for Harper to adopt an approach that had been used (unsuccessfully) by President Ronald Reagan in the U.S. — the ‘starve the beast’ strategy. The idea — which, on paper, seemed very simple and appealing — was to starve the government of revenue and then claim that, because the resulting deficits were bad for the economy, government programs and services would have to be cut to keep the debt in check. In doing so (according to the theory), the ‘beast’ would shrink in size and the private sector would become so deliriously happy as a result that it would immediately ramp up investment and spur growth.
So much for theory. It wasn’t hard for the newly-elected Conservative government to find a way to close the revenue taps in 2006. During the election campaign they had promised to cut the GST by two points. Say one thing for the Conservatives: They usually follow through on their election promises — especially the bad ones. Had Mr. Harper targeted income taxes instead of the GST, he could have claimed that he was undertaking good tax policy by reducing a disincentive to work and make money.
But good policy seldom wins out over good politics. The GST was the riper political target, so the Conservative government cut the GST by one point in 2006 and one point in 2007. That cost the government $14 billion annually. As a result of the GST cuts, the government recorded a “structural deficit” of $5.8 billion in 2008-09 — down from a “structural surplus” of $9.6 billion in the previous rear, a single-year change of $15.4 billion. And that was before the 2008-09 recession had even started.
Once the recession got rolling and the G20 nations agreed to introduce temporary stimulus spending equal to two per cent of GDP, the federal deficit ballooned: to $55.6 billion in 2009-10; $33.0 billion in 2010-11; $26.3 in 2011-12; $18.4 billion in 2012-13; and $5.2 billion in 2013.14.
Prime Minister Harper couldn’t have been happier. He hadn’t planned on a recession, of course; both he and Jim Flaherty blithely said at first that Canada wouldn’t be affected by the global meltdown (so much for their forecasting skills). But that didn’t matter. Now that he had his ‘deficit problem’ — partly engineered through the GST cuts and partly imposed by the recession — he could turn his attention to establishing his fiscal rep by cutting government programs and services and developing his brand under the label ‘Canada’s Economic Action Plan’.
Voilà: majority government in 2011.
Under the Economic Action Plan, the deficit will be eliminated by 2015-16. Although total net public debt will have increased by $150 billion, the debt ratio will have declined to 33.0 per cent in 2015-16 and will reach the government’s target of 25 per cent by 2019-20. Program spending will fall to below 13 per cent of GDP and will continue to fall thereafter. Public sector jobs have been eliminated, income and corporate taxes have been cut.
Which just goes to show that self-inflicted wounds tend to be easier to heal. But was this trip really necessary?
Let’s turn back the clock to 2006 and imagine the PM having a change of heart — deciding not to cut the GST by two points.
Without that loss of $14 billion in GST revenue, the deficit would have been much smaller. Simply adding back the $14 billion would have given us a deficit of $41.6 billion in 2009-10, $19.4 billion in 2010-11, $12.3 billion in 2011-12 and $4.4 billion in 2012-13. There could even have been a $9.2 billion surplus in in 2013-14 — two years before the government’s deadline. Net debt would have increased by less than $80 billion by 2015-16 — just over half the $150 billion increase we’re expecting now.
And there would have been no need to cut government programs and services to anywhere near the degree the government did, since there would have been no structural deficit requiring radical action. The level of the net federal debt would be lower in 2015-16 by about $70 billion; the level of the debt-to-GDP ratio also would be lower. Economic growth and job creation would have been stronger. Unemployment would have been lower.
But that was never the plan. Harper needed a deficit problem; the fact that the previous government neglected to leave him one was just a short-term inconvenience. From the very beginning his fiscal strategy has been driven by a commitment to his Conservative base and ideology — which demand smaller government by any means — and by a desire to show that he had ‘what it takes’. He desperately wanted to be seen by history as a better fiscal manager than his predecessors.
Harper and Flaherty both believed — as do most modern Conservatives — that smaller government inevitably leads to stronger economic growth. Unfortunately, stubborn reality has once again refused to cooperate with an impractical theory.
The evidence is clear: Cutting deficits does not by itself generate economic growth. The Conservative “growth friendly austerity” strategy has failed consistently, whenever and wherever it has been applied — in the U.S. under Republican administrations, in the eurozone in recent years, by the G20 after 2010 … and in Canada since 2010.
Cutting the GST by two points will go down in Canadian fiscal history as one of the worst public finance decisions ever. It served no useful purpose — apart from giving the prime minister the cover he needed to impose a neo-liberal fiscal orthodoxy that diminished the federal government while failing to generate growth and jobs.
All Canadians paid the price for securing Mr. Harper’s legacy. We’ll go on paying it for while.
Original Article
Source: ipolitics.ca/
Author: Scott Clark and Peter DeVries
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