Tuesday, September 15, 2009

Navigating Canada's Way Out of Recession Redux

Preston Manning calls for post-recession roadmap

In an op/ed column appearing in the Globe and Mail, Preston Manning writes about the current federal deficit, and compares it to the 14-year quest to put an end to Canada's last deficit.

He argues that a lack of planning undermined efforts to control that deficit, and argues that a plan is needed to tackle the current federal deficit.

The best reason for doing this, he insists, is not necessarily the deficit itself, but some of the unconsidered consequences of accumulating debt:
"To combat the current recession, governments around the world have instituted economic recovery measures breathtaking in their magnitude and scope. These include dramatically expanding the money supply (printing money), taking significant ownership positions in key sectors of the economy and heavily engaging in deficit spending.

Such measures have other significant and long-lasting effects besides stimulating economic growth.

Rapid expansion of the money supply can lead to a tsunami of inflation. Government ownership of businesses can lead to unhealthy dependencies, unfair competition, corporate inefficiencies and serious conflicts of interest when governments must also regulate businesses in which they have an ownership stake. And heavy engagement in deficit spending leads invariably to increased public debt, increased interest payments and the necessity of cutting services and/or raising taxes in the future to rebalance the books.

So what must be done to recover from the adverse effects of these measures?

Let me focus particularly on what might be done to recover from the orgy of deficit spending in which virtually all governments in Canada are now engaged.
Manning notes that the 14-year struggle to end balance the budget and begin paying down debt stemmed from not a lack of a coherent plan:
"At the federal level, Canada's last big deficit-spending binge began in the Pierre Trudeau years. Fourteen federal deficits in 17 years eventually led to a national debt of $572-billion and annual interest payments of almost $40-billion in today's dollars (or stated in 1984 dollars, $250.5-billion debt and $21-billion in interest costs).

In 1984, the Liberals were replaced by the Brian Mulroney Conservatives, who promised a more responsible approach to public finances. But federal spending continued to soar, the annual deficit and national debt continued to rise, and the government resorted largely to increased taxation rather than spending reductions to try to tame the deficit dragon.
By the time the Jean Chretien Liberal party was in power and ready (however reluctantly) to start tackling the national deficit, all then-Finance Minister and future Prime Minister Paul Martin could think to do was slash spending on health care, education and transfers to the provinces -- something the Liberals only recently admitted was a mistake.

The skyrocketing public debt and debt service payments that Manning alludes to were thus only one consequence of the Trudeau-Mulroney deficit spending era.

As the '90s wore on, so did public anxiety about Canada's debt. That anxiety was also felt in financial markets, where there was speculation that Canada could potentially default on its foreign debts. This anxiety, however, was not born in the 1990s. Public concern about Canada's debt had begun to solidly take root in the 1989s:
"According to the pollsters, as early as 1984 there was significant public support for deficit reduction as a policy objective, including major cuts in public spending, but politicians were slow to recognize or respond vigorously to this shift in public attitudes. So the leadership of the deficit-reduction movement began largely outside the formal political arena.

Market-oriented think tanks such as the Fraser Institute and the CD Howe Institute provided much of the intellectual capital for the movement, hammering away on the problem's dangers and offering alternatives for alleviating it.

Interest groups such as the Canadian Federation of Independent Business, the Canadian Chambers of Commerce, the Business Council on National Issues (as it was then called) and later the newly formed (1989) Canadian Taxpayers Federation added their voices, energy and resources to generate public and political support for budget balancing by governments at all levels.

Grassroots publications such as Ted Byfield's
Western Report and the radio talk shows gave media voice to the movement, and later several national newspapers joined the fray."
As Manning notes, it was only a matter of time before deficit-fighting arrived as the raison d'etre for a federal political party:
"And on the fringes of the political arena, the embryonic Reform Party (with Stephen Harper as its policy chief and fiscal critic) made budget balancing a central plank of its election platform and set out to prove that it was possible to elect candidates to Parliament on the pledge of saving taxpayers' dollars rather than spending more of them."
The Reform party contested its first federal election in 1988, the year Canadians bequeathed a second straight majority on then-Prime Minister Brian Mulroney. Although he had inherited a structural deficit from Pierre Trudeau, history remembers (and will continue to remember) Mulroney as one of Canada's biggest deficit spenders.

But appearances could be decieving. Free Trade was the central issue in the 1988 election campaign, with Mulroney supporting the North American Free Trade Agreement, and his opponents opposing it. Mulroney won a majority on the back of the free trade issue. But at their earliest opportunity (which came later in 1988), Albertans sent Deborah Grey, their first Reform MP, to Ottawa. Stephen Harper (who will also be remembered as one oc Canada's biggest deficit spenders) went with her as her Parliamentary Assistant.

At a certain point, legislators couldn't ignore the signs the Canadian people were sending them -- get the debt under control. Now. Or else:
"As the movement for deficit reduction grew in public support, municipal and provincial politicians finally began to take notice. (Federal parties, because of their distance from grassroots voters and taxpayers, are usually the last, not the first, to respond to major shifts in public sentiment.)

Though rarely recognized for it, the first provincial government to commit itself seriously to the goal of budget balancing was the Conservative government of Gary Filmon in Manitoba. At the time (1988), the province was running a $500-million deficit on total revenues of about $4-billion and it took seven years to reduce the deficit to zero. Manitoba was also among the first to pass budget-balancing laws making it illegal to run deficits except in specifically defined emergency situations.

Next it was Alberta, where Ralph Klein made a similar commitment in 1993, eliminating that province's $3.5-billion deficit in two short years while at the same time decreasing revenues as a percentage of gross domestic product.

And then in Ontario, where the annual deficit was in excess of $10-billion, the Mike Harris government, elected in 1995, reduced it to zero in four years.
But, as Manning suggests, the federal government can often be the slowest to respond. It took the Reform Party and scathing criticisms from Andrew Coyne to convince Paul Martin that he needed to get Canada's fiscal house in order.

As Manning notes, the Reform party is still remembered as the only party in the 1993 election to present a credible plan for reducing the federal deficit:
"Meanwhile, in the federal arena, where the deficit was approaching $40-billion a year, the 1993 election saw the demise of the Mulroney Conservatives and the election of the Jean Chr├ętien government. But that election also resulted in the election of 52 Reformers committed to reducing the federal deficit to zero in three years. Eventually, the Liberals, though philosophically inclined to ever-increasing public spending, felt the political pressure to move in the opposite direction, and by 1998 the budget was finally balanced."
This was not nearly so simple for Paul Martin as some would have suggested it was.

The Chretien government, at the time, was also conducting a social services review under Lloyd Axworthy. It took considerable time and effort for Martin to out-maneuver Axworthy in order to impress the importance of his agenda upon Chretien.

Various political tensions -- both inter- and intra-party -- led to the exacerbation of Canada's deficit and hampered the best-intentioned efforts to get it back under control.

Manning seems to suggest that these kinds of tensions are characteristic of a political environment in which there is no real consensus on the matter, and what is needed to ensure Canada can efficiently shed its deficit once the recession is over is a policy similar to Reform's "zero in three" policy:
"The most disturbing aspect of this story is that it took 14 years (1984 to 1998), and an enormous effort at great expense by tens of thousands of people outside the formal political arena, before the federal government could be persuaded to take the self-evidently necessary actions required to balance its books.

Given this history, what will it take to tame the current deficit, the one being incurred in the name of economic stimulation? Political leadership, more likely to come from conservatives than liberals or social democrats, would certainly help. But no doubt another major effort outside the formal political arena – by think tanks, interest groups and media committed to fiscal responsibility – will be needed to create the public pressure required before politicians will act.

That effort would be greatly aided if someone – perhaps one of the think tanks or a respected academic institution – were to provide a definitive history of the last deficit-reduction movement. Most of us involved in that exercise have only partial knowledge of who did what, of what worked and what didn't, and of how the whole process might have been expedited. A road map to deficit elimination, based on a comprehensive analysis of past experience, will be extremely helpful to the deficit-fighters of the future. Hopefully, this time it will not take 14 years to get the job done.
If Canada's political leaders establish a deficit-busting concession now, as opposed to waiting until Canada faces the threat of a complete fiscal collapse, Canada will be able to navigate itself out of the recession fairly quickly -- and perhaps even without an additional five years of deficit spending.

From the archives:

August 5, 2009 - "Navigating Canada's Way Out of Recession (And Beyond)"

1 comment:

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