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jadedragon
Administrator
Canada
3788 Posts |
 Posted - 04/08/2010 : 13:26:30
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Ken Boessenkool, From Wednesday's Globe and Mail
All conservatives have been intrigued by the spat between the big-c Conservative government and the small-c conservative Fraser Institute over the effectiveness of the federal government's $47.2-billion Economic Action Plan. While I'm hesitant to arbitrate this debate, the dispute has been so narrowly defined as to be unhelpful in answering a broader question: Did the Canadian government react appropriately to the economic downturn? The Economic Action Plan, after all, was only a very small part of that reaction.
The debate has left out a key component of the government's fiscal stimulus package. Well before the depth of the recession was clear and long before the government introduced its Economic Action Plan, Ottawa announced an extremely effective stimulus package. Its timing was impeccable, arriving just as economic activity was slowing. Its design was clever in that the money entered the economy the day it came into effect. Its target was brilliant in that it encouraged spending rather than saving so economic activity was boosted immediately. It was clearly sustainable in that the size of the package was well within most reasonable forecasts of future surpluses.
I'm referring to the government's reduction of the GST from 6 per cent to 5 per cent in January of 2008. Politics obviously played a role in the cut, but the November, 2007, Economic Statement defended it as part of the government's response to global economic uncertainty. Including the GST cut as part of the stimulus package also gives a more accurate view of the mix of spending and tax cuts used in response to the downturn, and makes Canada one of the heaviest global users of tax cuts in its stimulus package.
The debate also has underplayed the importance of the role of expectations in economic policy. Rational expectations is the economic version of you can't fool all of the people all of the time. More accurately, it says you can't fool any of the people any of the time.
Consider the U.S. situation. The United States is running deficits that are twice as large, and their debt levels are rapidly approaching those that Canada experienced when we hit the debt wall in 1995. Further, much of the U.S. stimulus package is increases in program spending health care a recent example that will continue. The rational expectation of a can't fool me American is that tomorrow will bring higher taxes, vastly reduced government services or higher inflation or all three. And the rational response would be to stop spending, and start saving for the rainy day that's coming. The result is the dreaded double-dip recession.
In contrast, Canada entered this recession coming off just more than a decade of the strongest fiscal management and set of books of nearly any country in the world. A significant portion of our stimulus package is for infrastructure or temporary measures such as the home-renovation tax credit that will end with the recession. As a result, Canada will emerge from this episode as it entered it with one of the smallest debt levels in the world. Expectations on affordability should not cause Canadians to defeat the stimulus by curtailing spending. By leading with tax cuts and having largely temporary spending, Ottawa has created all the right kind of expectations in terms of future fiscal prudence.
The debate also has ignored the fact that this recession was triggered by monetary forces a lack of liquidity in credit markets. It was a monetary recession that called for a monetary response. Canada was remarkably successful on this front not just because the Bank of Canada aggressively pumped liquidity into the economy via long-term low interest rates but also propped up the liquidity of our financial sector through other measures.
There are reasons why Canada is emerging from this recession as the envy of the world. Part of the reason is that Canada's decade of prudent fiscal management and its conservative financial institutions made us remarkably well-positioned going into the downturn. Another part is that the Canadian government, by and large, got the big things right it got the monetary and financial institution response right, and its affordable fiscal response contained healthy measures of tax cuts and temporary spending measures.
All that should give some reassurance to all but the most hardened conservative whatever the size of their c.
Ken Boessenkool is executive fellow at the School of Public Policy at the University of Calgary.
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The reasonable man adapts himself to the world; the unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man. George Bernard Shaw.
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