Will this economic reversal hurt Harper’s political capital?
OTTAWA—Erasing the deficit by 2014 was more than an accounting triumph en route to a Conservative majority last May.
The deficit promise also had cascading policy implications for many elements of Prime Minister Stephen Harper’s platform.
Oh, how things have changed.
Finance minister Jim Flaherty stood in Calgary yesterday to announce his government’s worst-kept secret: Ottawa’s books won’t be balanced by 2015.
A spokeswoman in Flaherty’s office has confirmed those conditional platform promises will only be implemented “when the federal budget is balanced.”
Economists—and many Canadians—have reacted to Flaherty’s deficit forecast with a yawn, considering Europe is in a full-blown sovereign debt crisis and the U.S. is mired in trillion-dollar shortfalls.
However, if there has been any change in Canadian public opinion about the necessity of balanced books, we are about find out.
If the Conservatives thought advancing the deficit elimination timetable by a year was a big political winner in April, why is pushing it back a year or two not a big liability in November?
Paul Martin, the Liberal finance minister who cleared Canada’s debt and deficit in the mid-1990s, says Canadians faced a very different situation then.
Canada’s debt-to-GDP ratio was approaching 100 per cent, near the same perilous territory that is engulfing Greece and threatens Italy, Portugal and others in Europe.
Martin says voters recognized something had to be done, but were loathe to accept the tough cuts that come with deficit reduction.
What made it work was that his government kept meeting and exceeding its targets, he says.
“In other words, we were not asking Canadians to make a sacrifice in a hopeless cause …. I think that’s one of the reasons Canadians got behind us.”
It’s a lesson the Conservatives have yet to learn.
“Let me be crystal clear,” Harper said during the 2008 election campaign. “A Conservative government … will not be running a deficit. We will keep our spending within our means.”
Two months later, the government delivered a budget forecasting a $33.7-billion deficit in 2009-10, which actually ended up being more than $55 billion.
Before Flaherty owned up to the book-balancing delay, sources suggested the finance minister was unlikely to announce any new major spending or cost-cutting measures, but will release fresh economic and tax revenue projections that would hit Ottawa’s bottom line.
For economists and markets, the gap between a balanced budget and a few billion dollars of red ink four years out is no big deal, as Canada still boasts the best fiscal numbers in the G7 and has among the most credible fiscal consolidation plans.
But the reputation Harper’s Conservatives have garnered as economic managers may suffer a setback with the concession they’re reviewing their plans only five months since the last budget.
The change comes following downward revisions to the economic growth prospects in Canada since June’s budget.
At the time, Canada had just come off two solid two quarters and the economy was expected to continue expanding at 2.9 per cent this year and 2.8 in 2012.
Then, the global economic outlook darkened considerably, with economists warning Flaherty last month to brace for slower growth rates of 2.2 and 2.1 per cent respectively, which will reduce Ottawa’s tax intake.
The Bank of Canada’s forecast is even lower at 1.9 per cent growth next year. The Parliamentary Budget Office is expecting 1.5 growth in 2012, but both of those forecasts are based on the expectations Europe will deal with its sovereign debt crisis.
If contagion spreads from Europe, Canada would likely slip into another recession, throwing off all government plans.
“Based on the private sector consensus and making an allowance for contingency, if the government wants to hit their 2014 target, they would need to lower their program expenses,” says Craig Alexander, TD Bank chief economist.
Alexander says Flaherty can still make the numbers work on schedule by implementing more cost-cutting measures, but given the global economic uncertainty, draconian measures are not advisable.
Canada’s economic rough patch.
Last week, Statistics Canada reported 54,000 jobs had vanished in October—72,000 full-time jobs—while the Bank of Canada has estimated the last three months of 2011 will see growth of less than one per cent.
Flaherty and Harper have stressed they intend to be “flexible” in budget planning and that fiscal stimulus remains a tool if conditions deteriorate further.
The Conservatives may face heat from the Liberals, who have openly questioned whether payroll taxes are the best way to support out-of-work Canadians.
Interim Liberal leader Bob Rae says forcing employees and employers to pay Employment Insurance (EI) premiums is counter-productive, discourages hiring and inhibits job creation.
He says those who can’t find jobs must be supported financially, but Canada needs a serious debate on how best to pay for it.
Flaherty has already said he will cut in half a payroll tax hike scheduled to go into effect January 1, which would have raised premiums by 10 cents on workers and 14 cents on employers per $100 of insurable earnings.
The changes will mean workers earning the maximum $43,000 of insurable earnings will see their take home pay shrink by about $23 a year, while firms will be paying an additional $31 a year per employee.
The government will also extend a work-sharing program giving employees the option of working fewer hours to help a co-worker keep their job and receive EI benefits from the subtracted hours until next October.
But Rae is still not impressed. He says the progress isn’t acceptable, despite Flaherty’s concession regarding the strength of the Liberal’s argument.
While he wants to end premiums, Rae offered no specific alternative to pay for Employment Insurance.