Sunday, November 30, 2008

The need for stimulus

I may have been a bit premature in announcing the end of our political quagmire, as the Tory capitulation on public funding subsidies will not appease the opposition. Obviously, that cannot be seen as the fundamental issue here, otherwise Harper will use it as a bludgeon later on, and be the stronger for it. Instead, the Liberals and NDP will press forward with coalition talks and keep focusing on the economy, as this is probably their best chance yet to take Harper down.

And what about the economy? Is the government really guilty of negligence in the face of crisis?

Before the election, I defended Harper on the economy, pointing out that much of Canada's troubles are completely beyond our control. We cannot help but be affected by a total meltdown south of the border; Trudeau knew what he was talking about when he made his famous comment about sleeping with the elephant.

But this "economic update" from Jim Flaherty was downright bizarre.

At a time when countries around the world are working to fight a global recession by stimulating economic activity through increased government spending, Prime Minister Stephen Harper's Tory government actually plans to put the squeeze on Canada's economy.

In its all-out effort to avoid running a deficit, Flaherty has promised that federal spending will be slashed by $5 billion in the fiscal year that begins next April, when economic conditions probably will be at their worst. Another $1 billion in windfall income will be banked, not recycled into economic stimulus, for a total squeeze of $6 billion.

"That's precisely the thing not to do," said Carlos Leitao, chief economist at Laurentian Bank Securities. Rather than a balanced budget, he believes, what we need right now is new spending of $15 billion or more to do things like bail out provincial budgets and boost benefits to the unemployed. This would translate into a deficit of about the same size, but it would prevent economic damage worth far more.

As a (possibly severe) recession looms, the government's focus appears to be on cutting spending and keeping the budget balanced. I'm as big a deficit hawk as anyone, but even I recognize the need for stimulus. Now is not the time to worry about balanced budgets. Now is the time to boost aggregate demand by injecting money into the economy. Canada is lucky to be in a position to do this with very little negative fallout, due to our debt reduction policies of the last decade.

I'm frankly a little puzzled by Harper's strategy here. I understand the caution on economic stimulus packages, but I don't understand why Flaherty would choose to focus on balanced budgets at a time of uncertainty and near panic over the economy.

1 comment:

Foster Karcha said...

Because deficit spending in times of economic crisis has been proved not work over and over...and over again?