Sunday, March 7, 2010

Budget 2010-2011: When in Doubt, Sit Tight and Wait it Out

Reaction to the latest federal budget has been muted: boring, same old same old, to be forgotten as quickly as the prorogation of Parliament. Well, given the uncertainty in the global economy, maybe boring is a safe bet while we wait and see what is going to happen in the United States and the European Union.

Looking at the numbers and by making comparisons with previous budgets, the 2010-2011federal budget is pretty much steady as she goes. Spending is up as a result of a deficit-fuelled economic stimulus, but as the saying goes: "we’re all Keynesians now."

In breaking down the numbers, I notice that spending in the key categories of transfers to individuals, social transfers, and program expenditures as a percentage of total expenses is pretty much the same as the Conservatives' first budget in 2006-2007. One exception is the amount to service the debt, which is down from 15.3% of total expenditures in 2006-07 to 11.2% in 2010-11.

On the revenue side, the most notable change over the last four fiscal years is that personal income tax now represents 50.5% of total revenues, up from 46.7% in 2006-07. At the same time, revenue from corporate income tax is now only 11% of total revenues, down from 16% four years ago. In absolute numbers, individual Canadians now contribute $7 billion more while the corporate sector contributes $12 billion less. In real terms, increased revenue from individual taxpayers is in keeping with inflation; however, for the corporate sector, its contribution is approximately $15 billion less in real dollars. Needless to say, the issue of the corporate sector’s contribution to deficit reduction will be politically contentious.

With regard to the environment and the need to address climate change, well what did you expect? If no one other than B.C. Premier Gordon Campbell noticed that we held the Spring not the Winter Olympics and that it was the warmest winter in the last 100 years in B.C., why would a government for and by the people do any different? Unfortunately, climate change remains an inconvenient truth. It is devoutly to be wished that the economic stimulus would be in reality a deep shade of green, but given the political reality of the alignment of self-interest of the maudits boomers with the investor class, there is little chance that Canada will allocate the necessary financial resources to address the problem in a significant way anytime soon. The only relief is some green schadenfreude from knowing that decreased conventional economic activity corresponds with decreased emissions of green house gases.

That being said is a stay-the-course budget with regard to its global revenues and expenditures an appropriate response to the global political and economic context?

This might appear strange coming from me, but if I put aside my own political and economic preferences and look at the level of uncertainty we now face in attempting to come to terms with the fallout from the financial crash of 2008 and the failure of our economic models to predict its occurrence, it appears that for now what the future holds in store is anybody’s guess. Given such a state of affairs, we need to wait before making the big decisions that we need to make.

First, we have no idea if we are out of recessionary woods. Forget the V-shaped recovery. That’s for sure. Yet, are we in a U-shaped economic period, a double dip W-shaped period, or the dreaded L-shaped period in which economic recovery is at least 10 years away? No one knows.

Second, what can we expect from the US economy? Consumer consumption accounts for 70% of US GDP and the American consumer is all tapped out, and Asia’s entire consumer consumption is only 40% of America’s, so it is not very likely that a global shift of economic activity toward the east will benefit Canada in a significant manner.

Moreover, the US economy has shed jobs for 26 consecutive months, more than 8 million jobs, coupled with 1.5 million people entering its labour market annually who are not finding work. This represents a job deficit of more than 10 million, which means that aggregate demand will not be returning to anything like 2007 levels for years to come. This does not bode well for Canada since most of our exports our destined for the U.S.

Third, what can we expect for the price of oil? Again, no one knows. Presently, it’s around $80 a barrel, but that could change quickly as oil did reach a historic high of $140 barrel not so long ago. The price of oil and the regulatory framework has a huge impact on Canada. Certainly, without changes to the regulatory framework, we would expect the price of conventional oil to continue to rise as world production and export levels off or begins to decline. This has huge consequences for the tar sands and for the value of our currency. Yet, we don’t know whether the US will impose a continent-wide regulatory framework. It will be difficult to get such legislation through the US Senate, but the US Environmental Protection Agency has the legal mandate, backed by a US Supreme Court decision, to regulate the emission of green house gases.

Fourth, where are interest rates going? Today, they are at historic lows, but will it last? In the short-term, Canada can afford to run up some substantial deficits since the cost of servicing the debt is very low, but that could change. A sudden upswing in the price of oil has in the past triggered substantial increases in the rate of inflation and corresponding hikes in interest rates. Modest inflation combined with low interest rates and real economic growth are actually beneficial to debtor nations such as Canada since inflation reduces the real value of the accumulated debt while real economic growth increases our capacity to pay it down. However, high levels of inflation combined with high interest rates and no or little real economic growth can substantially reduce our capacity to service our debt and would impact on our material well-being.

In other words, the economic dust hasn’t settled from the latest financial crash. Economic conditions could be radically different two years from now. As a result, staying the course for the next fiscal year seems to be the prudent thing to do. Yes, our accumulated debt will return to previous levels in absolute terms, but the real value of the debt has decreased while our capacity to service the debt has grown.

However, this state of affairs will not continue indefinitely. For the moment, the global economy is far from equilibrium, but a more stable order could re-emerge. We still will have some tough decisions to make since it seems unlikely that we will simply be able to grow our way economically back to prosperity. And this brings me to my final point.

If a population is faced with difficult decisions, it is my opinion that the only legitimate way of going about making these decisions is through a democratic process. Yet, Canada has not evolved from a constitutional monarchy into a modern democracy. Majority rule does not exist. We have plurality rule which is another way of saying that we are ruled by the most powerful oligarchy. Before making any deep structural changes to our economy, we should reform our political institutions so that any changes to our political economy represent the will of the many and not the desires of the few. If sacrifices are to be made, they will need to be made in a just and equitable manner. Otherwise, the social fabric of this nation will be tested as it has never been tested before.

No comments:

Post a Comment

All comments will be reviewed before posting. Civility is a must.