Conservatives Successfully Engineer Structural Deficit
The Tories were long ago bent on slashing the GST (7% to 5%) and corporate taxes (~22% to 15%). It seems to be in their DNA, so in spite of numerous groups–from economists to other political parties–cautioning them about the effects of such slashes they went ahead and found ways to pull it off. Predictably those actions have contributed significantly to our deficit, which according to Parliamentary Budget Officer (PBO), Kevin Page, is structural.
CBC News reported1 (13 January 2010) on the PBO report. The CBC article describes a structural deficit as “…a portion of a country’s budget deficit that exists even when the economy is running at full capacity during a period of expansion.” Which is important to keep in mind when listening to Conservative Finance Minister, Jim Flaherty, explain that future economic growth will be an important contributor to ridding ourselves of this deficit.
Page’s just-released report2 Estimating Potential GDP and the Government’s Structural Budget Balance (13 January 2010) states a number of interesting points. Right upfront it points out the worry in accepting the Flaherty-growth-justification.
“It’s unlikely that future economic growth will be able to alleviate the deficit.PBO’s estimates suggest that the Canadian economy was operating significantly below its potential in 2009. More importantly, PBO’s estimates also suggest that the downward trend in potential GDP growth observed since 2000 will continue over the projection horizon, averaging 1.9 per cent over the 2009 to 2014 period. The projected decline in potential GDP growth is a function of the projected decline in the growth of trend labour input, which reflects slower growth of the working age population and a decline in the trend employment rate associated with the shifting age composition of the workforce.”
Lest anyone is tempted to argue the PBO and Conservative government form their estimates through different accounting frameworks, the PBO report makes an interesting statement on its method. It notes that the frameworks are different but shows that its method nevetheless almost always produces results that since 1976 are strongly correlated with Finance Canada’s. It only recently began to diverge, as in, when the Conservatives took over and tried to paint a more rosy picture of their budgeting. Here’s a snapshot of that portion of the report.
“Despite the differences in accounting frameworks, calendar/fiscal years, and methodologies, Finance Canada and PBO’s estimates of the Government’s structural balance track each other closely over history (the correlation coefficient is 0.96). However, since 2006-07 (calendar year 2006) when the structural balance was estimated at $8.8 billion by both Finance Canada and PBO, the structural balance estimates appear to have diverged. Indeed, in 2008-09 (calendar year 2008) Finance Canada estimates a structural surplus of $13.8 billion while PBO estimates a $3.2 billion structural deficit.”
An article on the subject in The Globe and Mail3 (13 January 2010) said
“…even if the government successfully shuts off the taps on all stimulus spending by 2011 and keeps government growth below four per cent, it still will not have enough money coming in to erase the deficit. As a result, Mr. Page said there will be a structural deficit of $18.9-billion in 2013-14, which is the period when Ottawa expects to be narrowing in on a balanced budget.”
Since the report essentially rules out the possibility that economic growth could cover the deficit or even return us to non-deficit status, the other most obvious options are to either increase taxes or cut services. I don’t think it takes much effort to imagine the direction the Conservatives will go with that choice. They’ve already proven their propensity toward cutting taxes even when there isn’t good reason to do so, and repeatedly said they want to cull the government programs and services that help define the wellbeing of our society. Indeed in the same Globe and Mail article, it says
“Mr. Flaherty has said that if economic growth comes in lower than expected, savings can be found by not renewing government programs that have a set end date.”
Flaherty and Harper have been talking this way quite a bit. They’ve been chomping at the bit to cut government programs since they came to power. I’ve argued in the past that the Conservatives engineered much of the deficit specifically to create a rationale for cutting programs. Unfortunately many of those programs are important to our present well-being and our future growth, for example the recently cut CCL.
A larger portion of the population is heading toward retirement (particularly over the next few years). Additionally the global economic downturn means more people in Canada need assistance through programs such as unemployment insurance. Taken together that means the government receives less money in taxes but simultaneously has a greater responsibility to provide to social programs.
Finally, the rather more severe Toronto Star4 (13 January 2010) quoted Page
“We are going to have to take drastic measures, either spending reduction or tax increase, to get us back to balances… The question is, do they (the Conservative government) want to make short-sighted decisions or long-sighted decisions?”
The article continues to relate Harper’s lack of worry about a structural deficit and a debt-interest payment trap. It notes that during the 1970s/80s (the last time there were large deficits) Canada had to spend $.35/dollar on public debt interest charges.
(Update: I found an article from Reuters5 13 March 2009, in which Harper talks about seeing a surge in the jobless rate. However, he comments that “It doesn’t change our assessment that when the global economy does recover, all the demographic indications are that we will have labor shortages.” He’s thus recognized for a long time, the demographic trend toward having a smaller total workforce–inline with the problem of a smaller tax intake.)
