Flaherty Digs Himself a Deep, Dark Hole

Published by at 12:59 pm under Economics

By: Terence Corcoran:

Give Jim Flaherty high marks for rhetorical restraint: The words “shovel” and “ready” do not make it into the Finance Minister’s budget speech and appear only once in his massive 360-page budget plan. That’s where restraint ends, however.

Otherwise, there’s a shovel on almost every page. Within weeks, all Canadian taxpayers can expect delivery of summary budget documents accompanied by a shovel with a tag that says: Dig a hole, throw in $85-billion, and then hope you can get out of it when its all over, sometime in 2014, unless the fiscal winds shift and it gets deeper and you have to dig some more.

And it will get deeper. A federal budget is more than just a federal budget; it’s a fiscal blueprint for the nation’s politicians. Even if by some miracle of forecasting accuracy never seen in Ottawa’s budgetary history the federal government pulls out of deficits by 2014, by then the provinces and municipalities will have dug their own deficit holes.

Add in the looming provincial and local deficits that have been mandated by Ottawa, and the 2014 net national debt will have risen by another $30-billion or $40-billion on top of the $85-billion in cumulative deficits Ottawa forecast on Tuesday.

It’s the nature of the Canadian fiscal system, a tangled interlocking web of federal-provincial-local politicians whose spending and borrowing feed on one another. Here’s $500-million to build new arenas, says Ottawa to the provinces and the cities. But you have to throw in your own $500-million to get the money.

Since the provinces currently have no surplus money, and are in fact heading for their own deficits due to the economic downturn, they and their municipal governments will have to run their own $500-million matching deficits, thereby doubling the increase in the national debt by $1-billion.

Mr. Flaherty’s budget calls this “leverage.” Ottawa estimates that its economic action plan will add $40-billion worth of “stimulus” to the economy. The leverage factor, by the budget’s numbers, will boost provincial and local government deficits by at least another $12-billion over the next two years.

But even before the provinces begin to look at borrowing to pick up their share of Ottawa’s infrastructure, housing and other programs, they are already looking at billions in deficits. Last October, Ontario forecast a $500-million deficit. With the collapse in the auto industry and other sectors since then, Ontario could be heading for a pre-infrastructure deficit of up to $5-billion. If Ontario takes up its share of Ottawa’s infrastructure burden, Ontario taxpayers could again find themselves in Bob Rae territory. As NDP premier, he ran Ontario into a $9-billion deficit back in the 1990s.
Other provinces may not be in as rough shape as Ontario, but recent Canadian fiscal history shows that where Ottawa goes, so go our provinces. In 1995, when Ottawa last had a $35-billion annual deficit, other levels of government racked up $16-billion in deficits, for a grand total $51-billion.

All of which might be bearable or even welcome if such deficit spending actually contributed to long-term economic growth and job creation. Mr. Flaherty’s budget documents contain numbers that appear to show how various “expenditure and tax multipliers” will turn the deficit spending into more growth and jobs. The whole plan, they say, will increase Canada’s GDP by 1.9% by 2010 and create 189,000 “net new jobs.”

That might sound like a lot, but in the scheme of Canada’s economy, these are small changes. The 1.9% gain in growth, for example, is about the same size as the current economic growth forecasting difference between the Bank of Canada and the Department of Finance.

What these numbers don’t show is even more important. First, they don’t factor in the impact of the massive politicization of infrastructure and other spending that inevitably follows panicky government scrambles to build arenas, fund broadband networks and finance extravagant public transitprojects.

Second, the calculations behind these “multiplier” effects fail to take into account the cost to taxpayers and the loss of other more profitable andbeneficial investment opportunities that will be squeezed out by the surge government spending and borrowing.
If government deficit spending is such a great contributor to growth and jobs, then Ottawa and the provinces could adopt deficits and big spending budgets as a matter of routine. But they don’t, and for good reason. Even the budget’s multiplier numbers show that they have no lasting impact on growth. By the second year, the impact of the stimulus spending barely exists at 0.2%.

The jolt is gone by 2010, even if one accepts the analysis. The money will have been spent, and taxpayers will be left holding the shovel they will need to dig themselves out.

National Post January 28, 2009