Tuesday, October 28, 2008

Tough times for Deficit Jim

Choices, choices, what ever will he and Harper do?
TD Bank Chief Economist Don Drummond wrote in a recent research report that if the government proceeds next year with the combination of tax cuts and spending increases that it announced in the 2008 Budget, Ottawa will run a deficit next year of at least $10 billion and will continue to run deficits, albeit increasingly smaller ones, for the next four years.

Economists and government sources say it is unlikely Flaherty can find spending cuts of $10 billion in one year in order to balance the books. For one thing, there may be too much political damage associated with massive spending cuts. Many Conservatives, after all, believe they lost their chance at a majority government partly because of anger in Quebec over just $50 million in cuts to arts programs.

The federal government will spend $201.2 billion this year, not including debt charges.

Though $10 billion is only about five per cent of that number, much of that spending cannot be cut.
The report lists the kinds of things that would have to be cut to find $10 billion. You'd have to axe the Natural Resources Department ($2 billion), cut regional economic development ($1 billion), cut the Universal Child Care Benefit ($2.5 billion), and make a whole host of other choices (see report) in order to get you close to $10 billion. I suppose there would be many other targets to pick as well. None of them are good options. (I am assuming tax increases are off the table as options for these guys.)

They could run a deficit and deal with public opinion like this:
An overwhelming majority of Canadians say Finance Minister Jim Flaherty should slash the federal budget to balance the books, according to a new poll for Canwest News Service and Global National.

Only a handful say Flaherty should raise taxes to meet any shortfalls as government revenues shrink because of the slowing economy. And just 43 per cent of those surveyed by Ipsos Reid say it's all right with them if Flaherty decided to run a budget deficit to get the country through a rough economic patch.
Now that's an online poll, mind you. But still, it suggests the resistance in the public mind to the prospect of a deficit. Besides, we know Deficit Jim just committed during the election campaign to not having one. So how they get out of this pickle will be a thing to watch.

A few other economic items kicking around that will have political ramifications...remember how Harpie and Deficit Jim have assured us that the big $25 billion asset swap between CMHC and the banks is nothing to worry about, practically meaningless, along these lines:
Canada plans to buy up to C$25 billion ($21 billion) in insured residential mortgages to help cushion banks from the global financial crisis and address a "scarcity" of private-sector lending, Finance Minister Jim Flaherty said on Friday.

While details of the plan were slim, Flaherty stressed the program is not a bank bailout because the government is not buying equity, and that the mortgages are "high-quality assets" that are already insured by the Canada Mortgage and Housing Corp. (CMHC), a government-owned agency.
The prime minister, maintaining a lead in the polls, told reporters the move represented no cost to government.

"This is a market transaction that will cost the government nothing ... we are simply exchanging assets that we already hold the insurance on and the reason we are doing this is to get out in front," he told reporters in Brantford, Ontario. (emphasis added)
Well, here's a contrarian view:
Harper called the recent CMHC deal "simply a market intervention ... to ensure our credit markets are functioning strongly."

But Grinspun dismisses that interpretation: "Taxpayers are assuming risky assets and giving away safe ones."
In addition, in that preceding Star link, you can find criticism by a number of economists that this $25 billion step has been taken without any assurances having been provided that the credit relief it provided to the banks would flow through to consumers/the public. This mirrors recent criticism in the U.S.:
It was good news when Mr. Paulson finally agreed to funnel capital into the banking system in return for partial ownership. But last week Joe Nocera of The Times pointed out a key weakness in the U.S. Treasury’s bank rescue plan: it contains no safeguards against the possibility that banks will simply sit on the money. “Unlike the British government, which is mandating lending requirements in return for capital injections, our government seems afraid to do anything except plead.” And sure enough, the banks seem to be hoarding the cash.
So, do we think Deficit Jim and Harpie have the stuff to manage all of these economic challenges? It's not looking good at this point.