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.)

I remember reflecting at the time of the initial GST cuts what the real rationale might be–it couldn’t be what the Conservatives were saying publicly because that had too many holes to make sense. When the Tories kept announcing what seemed like short-sighted cuts to the taxes, which would have little to no economic affect on the majority of Canadians, why did they consistently tout these as putting money back into the hands of consumers (a sham).

What is the real rationale for the Conservatives’ GST cuts? The GST cuts affect the government’s ability to support various services and programs that impact the well-being of our society. Ah, but that’s right, the Conservatives aren’t generally in favour of such services and programs, they want to shrink government, preferring to leave everyone to fare for themselves. But they can’t come out and tell everyone they want to cut federal programs and services, because then they’d risk losing the minority popular support that they have. So what to do? How about engineering some great big deficits? A deficit situation enables the Conservatives to justify cutting federal programs and services, to justify selling off our crown assets to private interests, all under the guise of being fiscally responsible.

Let’s see how this adds up.

Reuter’s¹ reported (25 July 2008) that the Conservative-led government wasn’t off to a good start to the fiscal year.

“. . . posting a deficit of C$517 million ($507 million) for April and May as corporate and sales tax collection fell sharply. The deficit compares with a surplus of C$2.78 billion in the same two months of 2007. The weak results were due to a 17 percent decline in corporate income tax revenue as well as a 21 percent drop in intake from the goods and services sales tax, the Department of Finance said in a report on Friday.” [emphasis mine]

The article continues to note that the Conservative government estimated it would have a surplus of $2 to $3 billion for the year. It contrasts sharply with the prior year’s surplus of about $10 B. Striking however, that the Conservatives were still publicly estimating a surplus, not a deficit. It suggests that either they weren’t very good at taking stock of the economic situation or else they were simply trying to keep things quiet and control public perception over eventually slipping into a deficit.

Continuing with Reuter’s reports² (18 November 2008), we can see how much the Conservatives tried to veil the situation. This is about the time that budget officer, Kevin Page, prepared to release his first forecast.

“The idea of running a budget deficit in Canada has been political anathema since the 1990s when the previous Liberal government painfully eliminated it over a period of several years. Ottawa has subsequently posted annual surpluses, the only major industrialized country to do so.

The newly re-elected Conservative government of Prime Minister Stephen Harper insisted throughout this year’s election campaign that it would continue to balance the books. However, it has since allowed that a temporary deficit is likely. Finance Minister Jim Flaherty has said he expects to post a small surplus in the 2008-09 fiscal year but the budget might slide into deficit after that as the result of possible stimulus measures that have yet to be defined. In February, when the government laid out its spending plans for 2008-09, Flaherty saw . . . the surplus slimming down to C$1.3 billion in 2009-10.

Economists, including the influential chief economist of Toronto-Dominion Bank, Don Drummond, have estimated Canada could face a budget shortfall of up to C$10 billion next year.”

At about the same time, the Montreal Gazette reported³ (14 November 2008) Finance Minister, Jim Flaherty’s intentions to sell crown assets.

“Finance Minister Jim Flaherty said yesterday the Harper government is considering selling real estate and other crown assets to help keep the budget balanced as the economy worsens. . . . “We are going to review the corporate assets, the capital assets, of the government of Canada, to see whether they still perform a useful function for the Canadian people. If that review shows that there should be some assets that should be sold, then we’ll go ahead with them.”"

Clearly (because Flaherty says so) the Conservatives knew at this point that they would have at least a difficult time balancing the budget. But he puts the blame on a worsening economy, totally neglecting his own government’s reckless GST cuts. Or were they reckless? Maybe they served the Conservative strategy of reducing federal programs and services. Flaherty’s talking about selling off crown assets–those belong to us don’t they, not private parties. But this talking strategy will prove consistent with future Conservative announcements and with current Conservative ideology.

Jumping ahead, the Conservatives started predicting they’d run a $34 billion deficit for 2009/10, and a $30 B deficit the year after. Harper said the budget they’d introduce would have “permanent tax cuts”–interesting way to deal with a shortfall: lose more money.

The CBC reporting⁴ (22 June 2009) on the massive federal deficit expectation points out that we’re likely to see what had been estimated as a $1.3 billion surplus changed into a $50 billion deficit. Roughly $10 billion of that can be attributed to the GST cut. That’s $10 billion in federal social programs down the drain. The article quotes Canadian autoworks economist Jim Stanford on the link between cutting the GST and the purchasing decisions “The links are not as strong as you might think…” which corroborates others’s positions at the time of the announced cuts (I called attention to these just above).

To be fair, the article also notes that $10 B is only a portion of the ~$50 B deficit. But much of what led to the deficit was not as predictable or controllable as the $10 B portion. Part of the deficit comes from measures, like the economic stimulus taken (and to varying degrees pushed by the other parties) to deal with the severe recession.

Nevertheless $10 B of the deficit was within the purvue of the Conservatives’ decisions. That’s $10 B that could have been used toward stimulus and social programs. That’s $10 B that could have been considered a safety net for a worsening economy (which as we know now, it did). The Conservatives had a safety net coming into office, which gave them some  room to manage our country even while the world was heading into a deep recession. Rather than recognize their good fortune in having that wiggle room they put policies in place, which even at the time signalled an end to such a safety net. That’s an intentional act.

So I ask, can it be reckless planning? Lack of forsight? Or is it part of the Conservative strategy to reduce the government–recognizing that if anything dire did happen, they’d get their opportunity to cut federal programs to support only the most essential of federal duties? I think it’s the latter. While I may disagree with their goals, calling them short-sighted, I don’t actually think the Conservatives are stupidly bumbling around with these measures, rather they’re carrying through with their policies for a reason.

The United Press reported⁵ (11 September 2009)

“Canada’s budget deficit was adjusted upward to $55.9 billion this year . . . Flaherty said much of the effort to get the deficit down to $5.2 billion by 2015 will “require decisions of government that won’t always be popular or pain free,” and “it will require a lot of saying ‘no’ to pet projects and special interests.”"

In order to reduce the deficit (not even talking about hitting a surplus again) by 2015, Flaherty starts trying to get the public used to the idea that cuts will come, and that they’ll be painful. Wondering what he characterizes as “pet projects and special interests”?

My guess is that’s just about anything outside current Conservative doctrine. How long before the Conservatives proceed with deeper cuts to cultural programs, social services, and more? Could cuts required to get us out of this deficit eventually be a rationale for the Conservatives to open the door to privatized health care? So much of the Conservative agenda, reigning in the social infrastructure, which characterizes (in part) the well-being of Canadian life, comes down to cutting the programs and services that are now Canadian institutions.

The National Post⁸ (2 November 2009) discussed Kevin Page’s report (Parliamentary Budget Office) examining our future deficit in relation to the Conservatives’ plans. His office is of course, supposed to shed light on what goes on within their domain and has sometimes been at odds with the Conservatives’ numbers. Page says the federal government will be in a substanatial structural deficit for a number of years and that the government will have to raise taxes or else make cuts in its programs. He also brought up an interesting issue.

“According to Mr. Page, the government’s projections include $5.8-billion in unidentified savings over the next five years through reviews of program spending, including $2-billion this year. Mr. Page says his office has requested expenditure planning documents from the federal Treasury Board, but has thus far been rebuffed.”

And now that the holidays are upon us, the Conservatives are releasing plenty of bits warning that they’ll begin making cuts–are these the unidentified savings, Page mentioned? Perhaps the Conservatives think people will forget these warnings over the holidays, or that the warnings will sink into the background of our consciousness so we’re more receptive when they finally do occur. The Globe and Mail⁶ (21 December 2009) talks about Harper’s stimulus plan exit strategy involving years of “belt-tightening”. They quote Stephen Harper saying:

“The government’s approach will be clear. We won’t be raising taxes, but we will be constraining growth . . . And within four to five years, if we follow that path, we should be back to a balanced budget.”

Harper uses the euphemism “restraining growth” but as his government noted previously, they mean cuts to federal programs and services, along with selling off crown assets. Reading the language used by Harper and his Conservatives, and the way it gets reported frequently you can see that they use words like frugal and belt-tightening, which imply wisdom and resolve rather than the actual short-sightedness or cunning strategy. The article continues with insightful counterpoints from respected economists and ministers

“Mr. Harper’s view that his government will be able to chip away at deficits by squeezing the growth of public spending has been questioned by economists and by former officials with the Finance Department. Former deputy ministers Scott Clark and David Dodge [former Governor of the Bank of Canada] have already stepped forward to challenge the government’s plans for eliminating the deficit, which is projected to reach $56-billion this fiscal year. Mr. Clark has said that Ottawa will have to raise the GST, which Mr. Harper cut in 2006.

“I don’t think it’s very likely that they can balance the budget without some very severe spending restraint,” said Bank of Montreal deputy chief economist Douglas Porter.”"

It’s not just Flaherty and Harper talking cuts, but well-known economists saying the Conservatives cannot follow through on their promises without backtracking their initial decisions on the GST cut or else severely cutting spending. And last but not least, let’s follow this up with the most recent news coming from Jim Flaherty’s mouth and reported by The Globe and Mail⁷ (22 December 2009).

“”Over time, what we’re going to see in the federal government in any event is some attrition because of the demographics and aging public service and we’ll have to be mindful of that as we try to watch growth in spending and restrain growth in spending,”"

Which is an oblique way of saying the Conservative minority government would look toward cutting public services. How can I justify that comment? Consider that if you don’t rehire public workers, or worse, you eliminate their jobs, then you no longer can offer the public services they were responsible for delivering. The article says

“Aiming for a leaner civil service, and looking to the salary savings of a reduced federal work force, provides a new twist on what has long been viewed as the public service’s demographic challenge. . . . “I hope he realizes that when you cut public servants, you cut public service,” said Gary Corbett, the president of the Professional Institute of the Public Service of Canada. Mr. Corbett said cutting public-service jobs means cutting back on important jobs like food safety inspectors and scientific research.”

The Star⁹ (23 December 2009) also has a piece on Flaherty’s recent announcements. It provides some other details such as marking a flippant sounding attitude toward the situation and this point of Flaherty history:

“In his 2001 Ontario budget, Flaherty handed $2.4 billion in tax cuts to the province’s corporations, promised personal tax breaks and paid down $3 billion in provincial debt – all while balancing the books by holding down badly needed expenditures for universities, hospitals and infrastructure projects.”

Furthermore, according to the Globe and Mal article, Flaherty believes government revenues will largely stem from economic growth. That’s sure a positive outlook. While that would be welcome and might even be likely, it’s far from certain. Things could even take a turn for the worse.

“The concern expressed by the deputy ministers and others is that the government’s revenues have fallen so steeply that Mr. Flaherty simply will not be able to find enough savings to wipe out the deficit. They argue that even when economic growth returns to normal, the Conservatives’ two point GST cut has left Ottawa with a continuing deficit.”

The Conservatives have thus set up the game board for a future election campaign. With the spectre of permanent deficits, they can pit their party’s harsh cuts to federal services against the other parties’ options, which will likely be to either mimic the Conservative choice or to reverse the tax cuts that the Conservatives propaganda’d their minority public support into applauding in the first place.

The GST enables the federal government to collect a sizeable amount of money that supports all sorts of programs improving the well-being of Canadian living. With respect to the Conservatives’ reducing the GST from 7 percent (in 2006) to ultimately 5 percent in 2007, The Toronto Star said¹ (2 November 2007)

“Economists winced. (Reducing a consumption tax neither boosts productivity nor encourages investment.) . . .  Cash-strapped mayors, weary anti-poverty activists and disheartened aboriginal leaders looked wistfully at the foregone $5.2 billion. And shoppers quickly forgot they had an extra $3.04 a week jangling in their pockets. . . . Ottawa is passing up the chance to strengthen Canada’s industrial base, shore up its aging infrastructure and upgrade the skills of its workers. It is saying that cities can solve their own financial problems, aboriginal communities can continue to languish and the gap between rich and poor can keep growing. . . . Urban voters could have been spared a steep rise in property taxes if Harper had shared 1 cent of the GST with municipalities, rather than giving consumers a bit of extra change at the cash register.”

So if cutting the GST would cause such difficulties for fixing our infrastructure and all sorts of societal issues, who and how exactly would it help? A CanWest News article on Dose² (1 January 2008) explained

“Patti Croft, chief economist with the investment firm Phillips, Hager and North, said anyone making big-ticket purchases will benefit from the consumption tax reduction. But, she said: “In general most economists would prefer a cut in income taxes. It’s a more efficient way to reduce the tax burden. . . . “”

According to the article the cut puts $5 billion ($6 according to Harper) back into the economy. But that equates to only between $150 – $200 per family, per year.

The cut in the GST is really only felt by those capable of making very large purchases, as The Star article noted: “The biggest beneficiaries will be the affluent. A corporate executive purchasing an $80,000 luxury sport utility vehicle will save $800. A single mother buying a $10 child’s snowsuit at Goodwill will save 10 cents.”

In other words the GST cut has almost no real effect on the majority of people’s disposable income but it rips roughly $5 billion dollars out of the government’s hands to effectively use on the programs that make Canadian life better.