Tag Archives: C.D. Howe Institute

The consequences of a slow-growth era


In a report that will bring only scowls to the faces of Conservative party operatives and their masters in Cabinet, a McGill University economics professor argues that the time has come for a kinder, gentler hand at the tiller of the national economy.

It’s not that the HMS Canuckistan is in any real danger of sinking under the weight of the jobless hordes its ferrying from one unpromising corner of the country to the other. Indeed, both the Bank of Canada and the International Monetary Fund predict that the Canadian economy will, in fact, grow marginally by 2.2 per cent this year and 2.4 per cent in 2015.   

It’s just that politicians and policymakers have fired up the engines about as much as they can, and there’s not much more they can do to speed the pace. They, and we, must face facts: This boat is permanently puttering.

“Canadian monetary policy has little ability to further stimulate Canadian growth. Given the large amount of uncertainty now faced by Canadian firms, further reductions in the policy interest rate are unlikely to be effective in stimulating aggregate demand,” writes Christopher Ragan in a commentary for the C.D. Howe Institute.  “In addition, the ongoing problems associated with very low interest rates cannot be ignored and may soon present the Bank of Canada with a compelling case for rate increases.”

Yes, “Canadian fiscal authorities have more room to manoeuvre than their counterparts in many other developed countries.” Still, “there remain solid arguments for budgets to be brought back to balance in the next few years.”

Since neither monetary nor fiscal instruments are likely to leverage faster economic growth, and since the private sector remains as jittery as a cat in roomful of rockers when it comes to parting with its money for capital investment and skills development and training, slow growth is here to stay, at least for the foreseeable future.

So, then, what’s a prudent government to do?

“Canadian policymakers should accept the continuation of Canada’s slow-growth recovery for the next few years. Slow growth has undesirable consequences, however, including longer unemployment spells, more part-time employment, and a greater incidence of long-term unemployment. Policymakers should focus on addressing the associated burden by enhancing income support for the unemployed, increasing the mobility of workers and improving incentives for labour-market training.”

Put it another way: Politicians in bad times have a duty to observe the progressive natures of their souls and care for the underprivileged, relieve the burdens of the downtrodden and disenfranchised and, in general, act like human beings for once in a very long while.

In fact, none of this has been part of the job description, at least in the western political canon, since Margaret Thatcher and Ronald Reagan ran away with the keys to the democratic system’s castle some 30 years ago.

Still, it’s high time that those we elect to public office recognize that fierce individualism and the frontier spirit of so-called free-market capitalism carry with them certain drawbacks – one of which is the tendency to blow the world’s financial systems to kingdom come every so often.

In this lies pragmatic reasons for Prof. Ragan’s prescriptions. In his commentary, he identifies four specific groups on whom the “burden of recessions and slow economic recoveries is likely to fall disproportionately.”

The first is comprised of people who lose their jobs as a direct result of economic blows. Then there are those who are new to the labour market (young people and immigrants) and can’t find gainful employment despite their often valiant attempts. “Third are those who find a new job but only one that is of lower quality than what they desire,” he writes. “Empirically, this group is often identified as involuntary part-time workers. The final group includes individuals who remain unemployed for an extended period of time, unable to find any job or one appropriate to their skills. Their burden is both the loss of income they experience as well as the likely degradation of their skills and reduced employability that often accompany long-term unemployment.”

If governments turn a blind eye to these individuals, they are essentially ignoring all but the comfortably affluent and the very rich. And alienating most of the voting public makes for mighty poor politics only a bit more than a year out from an election.

Scowl as they might, but those who currently stand at the helm of the economy ought to consider that when managing public expectations, kinder and gentler can also mean smarter.

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A tale of two debt loads

Mountain of debt...maybe we grow accustomed to its face...

Mountain of debt…maybe we grow accustomed to its face…

Implementing prudent fiscal policy is, for finance ministers, like threading a needle with a tightrope. Just ask Ottawa’s Joe Oliver or Fredericton’s Blaine Higgs who are, for very different reasons, attempting to execute that particular circus trick.

In the wake of a C.D. Howe Institute report that calls for the federal government to loosen up on its avowed purpose to balance the national budget by 2015 come what may, Mr. Oliver thunders like a Calvinist preacher: “Our government will not open the taps on reckless spending. We will not go down that well-trod and irresponsible path to economic decline.”

Still, economist William Scarth is adamant. “The federal government should delay its final stage of deficit reduction by three years,” he writes in his report for C.D. Howe. “If its deficit-to-GDP ratio is held at one-half of one percentage point for three years before reducing it to zero, it is estimated that the nation’s unemployment rate would be four-tenths of one percentage point lower during this three-year period (the equivalent of 75,000 new jobs).”

He’s not alone in this thinking.

A recent Canadian Press piece quotes several noted experts – some of whom are not partisan word warriors – who point out that the Canadian economy is not, in fact, in especially good shape. Over the past 12 months, only Alberta has created any jobs –  and even there, 72,000 new positions are not enough to boost the flagging fortunes of Ontario, Quebec or, for that matter, New Brunswick.

“Balancing the budget is a political imperative not an economic one,” NDP finance critic Nathan Cullen says. “It’s like balancing the family budget and not feeding the kids.”

Meanwhile, Liberal deputy leader Ralph Goodale writes in a recent editorial, “For months on end, (the Harper government) dismiss weak employment numbers like the ones recently reported by Statistics Canada for the month of June – as just ‘monthly volatility’.  But it keeps recurring, month after month. One might ask, at what point does that so-called ‘volatility’ become an undeniable trend in the wrong direction. Or to put it another way, when will Mr. Harper pull his head out of the sand?”

Then, there’s David Dodge, a former Bank of Canada Governor whose Spring 2014 Economic Outlook for the law firm Bennett Jones observes: “It is. . .important to realize that in the current environment of low long-term interest rates, fiscal prudence does not require bringing the annual budget balance to zero almost immediately. Small increases in borrowing requirements to finance infrastructure investment would still lead to declines in the debt-to-GDP ratio. Moreover, with low interest rates, it is the right time for governments and the private sector to invest in infrastructure.”

Finally, the CP taps Bank of Montreal chief economist Doug Porter for his views. Says he: “The market is not crying out for a tighter fiscal policy at the federal level. If the government wheeled out a significant medium-term infrastructure program, I don’t think I’d have a big problem with it they can borrow very cheaply and there’s a pretty good case to be made that there’s lots of demand for infrastructure.”

Move eastward to New Brunswick and witness a whole different tale of woe. Here, Finance Minister Higgs would give his left pinky to own Mr. Oliver’s set of problems, i.e., to spend or not to spend.

According to the latest audited financial statements, the province finished fiscal 2013-14 with a deficit of $500 million (about $20 million more that anticipated) on a long-tern debt of $11.6 billion.

Meanwhile, New Brunswick’s population of 755,464 people continues to age, making a quick return to fiscal health about as likely as a late-July nor’easter.

Still, plucky Premier David Alward enthuses, “We are turning the corner and we see revenue projections on target or actually a bit ahead of target from what we are projecting.”

Of course, to do that, Telegraph-Journal reporter Chris Morris notes “additional revenues of $1.129 billion, a 14 per cent increase over 2014-2015, must be achieved.”

Not even on his very best day would Mr. Oliver walk that tightrope for Mr. Higgs.

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And now for something completely different: good news for New Brunswick. . .sort of



New Brunswick may be drowning in debt. In fact, practitioners of the wooly science of fiscal forensics may have already pronounced this province dead on arrival. But don’t we just do a bang-up job reporting our woes to the rest of the world?

The C.D. Howe Institute says we deserve a little praise for a change. Specifically, Colin Busby of The C.D. Howe Institute tells the Saint John Telegraph-Journal that, according to his annual study on government spending overruns in Canada (also known as “The Pinocchio Report”), this province does “reasonably well” predicting its financial condition. We are, in a phrase, “middle of the road”, which is better than road kill, I suppose.

What’s more, we’re brutally honest with ourselves and the rest of the country about the hobo clothes we’re forced to wear. “New Brunswick is one of the jurisdictions where you can clearly find comparable numbers,” Mr. Busby says. “You simply find what the budget promises were and then find the numbers in the public accounts and compare them. That’s a positive story for New Brunswick.”

Still, he adds, “When it comes to spending overruns and the ability to hit budget targets, either overshooting or undershooting (New Brunswick) is not in the range of Ontario and the federal government who have done a significantly better job in terms of holding to what they promised in their spring budgets.”

Here’s how the numbers shake out: Over the past 10 years, cumulative overruns, expressed as fractions of 2013/14 budgeted spending, were highest in Saskatchewan (36 per cent), Alberta (26 per cent) and Manitoba (22 per cent), lowest in Canada, overall (one per cent), Ontario (five per cent) and Nova Scotia (seven per cent).

New Brunswick overspent by $1.2 billion over the past decade, which is bad. On the other hand, averaged out over the period, we came in less than 15 per cent off our annual targeted goals, which is good. Sort of.

For a finance minister, there is, I’m guessing, a certain comfort in knowing, with any degree of accuracy, just how badly off your jurisdiction is in the scheme of things. It’s a little like being sentenced to an indeterminate jail term. At least you know you have a cot; let’s just hope your bunk buddies in the bond market aren’t complete psychos.

But, in the larger context, how instructive or useful are these sort of statistical parlour games?

That New Brunswick manages to “present well” is vastly less important than its moribund economy, the structural instability of which makes accurate budget forecasting a near impossibility (a fact which suggests that the province’s reasonably fair reporting record is more a function of good luck than good prognostication).

Meanwhile, the Conference Board of Canada forecasts continued stormy economic weather for the province. “Prospects for New Brunswick’s economy will remain dim for at least one more year,” it said in its revised winter outlook earlier this month. “Cuts in the potash industry, and the closing of the Maple Leaf Food plant in Moncton, will limit economic growth to 0.8 per cent in 2014.”

How will this affect the next round of budget promises?

An even more intriguing question is whether a fully functioning shale gas industry, which should make us all filthy rich, will also make our elected officials filthy liars, though through no fault of their own.

The C.D. Howe Report notes the paradox common to provinces rich in natural resources: Their budgets are even farther from target than are those of patently poor provinces, such as New Brunswick. Economic instability, it seems, cuts both ways.

“Jurisdictions that are more dependent on natural resources showed sizable positive revenue biases: Saskatchewan, Newfoundland and labrador and Alberta all had biases of eight to 10 per cent,” the Institute noted. The natural-resource dependent jurisdictions that more affected by commodity-price swings also had low accuracy scores.”

So, then, the more money a jurisdiction has sloshing around in oil and gas wells, the less veracious are its budget forecasts.

What a delicious irony.

Still, if I had to choose, I’d rather the province I call home be recognized for the power of its industry, than the accuracy of its numbers-crunchers.

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