Thursday, March 19, 2009

Harper responds to David Dodge's criticism

Harper responded to the Globe report containing David Dodge's criticisms while at an event in Toronto yesterday. He easily dismissed them, of course, as if Dodge, the former Bank of Canada governor is just any other critic. But privately, the Conservatives were "furious," thus telling us just how much weight Dodge's views actually carry. About Mr. Harper's response then...

On the GST cuts

Dodge cited the GST cuts as having caused a structural deficit, harming our fiscal capacity. Dodge mused about raising it back a point, at some point in the future. Harper's response on that point:

"That's just wrong," Harper told a Toronto press conference. He added the GST cuts – that lowered the GST from 7 per cent to 5 per cent in two steps – were an important boost to the economy. He cited the cuts as the key reason Canada was "one of the last major economies to go into recession."

Said Harper: "Let me assure you, while our opponents may favour raising the GST back up, this government will not do that."

Harper also lashed out at opposition parties for doing nothing more than criticize.

"Of course, we've had no alternative suggestions from anyone on any other course of action to take," he said.

"I think the opposition simply attacking the Canadian economy adds nothing. I mean, we all know we have difficult circumstances."

"That's just wrong." Well there's a well reasoned argument for you. No explanation as to why the cuts have not caused a structural deficit.

On the partisan angle, no matter how much Mr. Harper would like to turn every critic into a partisan hack, Dodge's credibility as a former Bank of Canada governor lies specifically in his non-partisan persuasion. Who do you believe, Mr. Dodge who points out the simple math, that $12 billion per year is now gone when we need it as we move into significant deficit territory, or Mr. Harper, who responds by launching a straw man partisan attack against his political opposition?

About that IMF report

Second, Mr. Harper and his crew seem to be quite taken with that IMF report from last week and are waving it about as a shield in response to criticisms such as Dodge's. An IMF mission "...visited Canada during February 23-March 9, 2009 for discussions with officials and the private sector, as part of the IMF’s regular Article IV consultations with its member countries." The IMF report is here, "2009 Article IV Mission to Canada: Concluding Statement," and it's not all as rosy as the PM would have you believe. Here's what Harper said about it as he raised it to deflect from Dodge's criticism:

The Prime Minister also bristled at the suggestion his recovery plan was not well thought out.

“That's certainly not what the International Monetary Fund said,” Mr. Harper said.

The International Monetary Fund has said, said last week, our macroeconomic policies are exactly the appropriate policies for today's situation. That's what we will continue to pursue.”

Here's part of what the IMF "mission" said about the Harper government's "macroeconomic policies":
Macroeconomic policies

7. The mission supports the large, timely, and well-targeted fiscal stimulus in Budget 2009. The stimulus package is appropriately sized—well above the Fund’s benchmark of 2 percent of GDP. It is also prudently based on a worse economic outturn than private sector forecasts. With sizeable infrastructure spending and permanent tax cuts, it is weighted toward items that are most effective in stimulating demand. Its steps to boost the safety net will protect Canada’s most vulnerable, and training enhancements will facilitate reallocation of displaced workers. The budget appropriately leverages provincial stimulus, and provinces’ intentions to launch supplementary packages are welcome. The mission also welcomes the move to cut external tariffs, which is in line with Canada’s long-standing commitment to trade liberalization and openness. (emphasis added)
About those italicized parts...first, let's keep in mind that Mr. Harper now citing the IMF as approving of his large, well-targeted stimulus is quite an example of chutzpah in and of itself. His November update foresaw no need for such an effort, spoke of surpluses and but for the threat of bringing his government down, he wouldn't have acted to bring in a stimulus plan at all. Do we have any illusions that if he had a majority he would be so acting, in contravention of his economic beliefs and in light of the hue and cry from his supporters who have been outraged by the budget? So for Mr. Harper to be citing the IMF approving of his macroeconomic policies, the sudden convert who had to be forced to act, it's very rich.

With respect to the stimulus being "prudently based on a worse economic outturn than private sector forecasts," we learned just Monday that the TD Bank is saying that deficit projections in the budget are already proving to be out of date and the income projections the government is using are too optimistic. So are we to believe the IMF or the TD Bank on the ground in Canada? These new economic forecasts "...would see Canada's federal debt swell by $81.5-billion over the next two years instead of by $63.5-billion as the Harper government forecasted seven weeks ago." (preceding Globe link) The Parliamentary Budget Officer has weighed in with a new outlook as well. The IMF are out of date here and are off.

With respect to the training enhancements for displaced workers, we've learned that the government is requiring workers to pay out of their severance for that training. The government website has been overloaded by people looking for work. And with respect to the leveraging of provincial stimulus plans, on infrastructure, it remains to be seen whether the requirement that federal funds be matched will undermine its impact. So let's not overdo it on the IMF-says-my-macro-rocks shtick.

As for the rest of the brief IMF report, while they do speak of Canada being in a relatively better place than other countries, it's not clear how that high level rhetoric that the PM keeps repeating helps the 212,000 who have lost their jobs since January 1st. Does that make it better?

And while there's also praise for our banking system, little of that has to do with Mr. Harper. As BMO's economist put it yesterday, the constant refrain about our banks by such entities as the IMF is being "oversold" in any event:

"Many have in turn torqued this and other fundamentals to assert that this leaves Canada relatively well placed in this [economic] cycle - including the federal government, the International Monetary Fund and the Bank of Canada," he said.

"Amid all the well-deserved back patting is the rather uncomfortable fact that Canada's economic indicators are now deteriorating nearly as quickly as their U.S. counterparts."

He said employment in Canada has declined at almost the "same sickening" pace as the U.S. over the past four months, and auto sales and housing are "pulling a pale imitation of the horror show south of the border" as this country gets "dragged along for the ride in the downturn" afflicting the United States.

And then there are entries like these in the IMF report:
3. The global deterioration is adversely affecting Canada through its strong international linkages. In the fourth quarter, real exports fell by 17.5 percent (annual rate), and the external current account balance registered the first deficit in 10 years. Domestic demand shrank as well, as households and businesses retrenched amid falling commodity and asset prices, and headline GDP declined at the fastest rate since 1991. Going into January, the economic environment continued to deteriorate; the unemployment rate rose to 7.2 percent and rising economic slack contributed to a fall in core inflation from 2.5 percent to 1.9 percent (year on year).
...export declines and soft commodity prices are likely to weigh on employment and income, while uncertainties about near-term prospects may restrain investment. With economic slack widening, core inflation will decline. Downside risks predominate, including negative spillovers if the global environment worsens more than expected.
The larger point being that the IMF report is not a shield for Mr. Harper from legitimate domestic criticism from reputable corners. It has its problems and we should keep them in mind if the Conservative plan is to keep waving it in our face.

All of which is a rather lengthy way of saying that Mr. Harper's response to Mr. Dodge did not measure up and as with most spin coming from the PM, requires careful scrutiny.

More on the Dodge smackdown, here.