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WINNIPEG FREE PRESS per Joe Hueglin
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Date Posted: 10:28:41 02/21/03 Fri
Author Host/IP: d150-99-156.home.cgocable.net/24.150.99.156
The Legacy Budget
Thursday, February 20th, 2003
By Norman Cameron
Happiness, the philosophers tell us, comes from reality exceeding expectations. Misery comes from the reverse. Perhaps that explains why Canadians are complaining so much about a budget that offers almost everybody something.
Expectations were certainly high. Much of the budget had been more or less promised in the prime minister's Throne Speech. The ambitious program laid out there suggested that this budget would be Jean Chrétien's legacy, the long-term gain that we earned with all that short-term pain under John Manley's predecessor. Every lobby group with a voice made its claim to share in the largesse we could all see coming, and then both Finance and the Prime Minister's Office said yes to all of them.
Of course, even the Canadian economy in good times cannot finance everything at once, so while all the lobby groups got a piece of the pie, they each got a pretty small slice. Had expectations been managed differently, many of the lobbies might have been happy to have some pie rather than none. Mismanaged expectations may be one of the consequences of budget-making being taken over by the Prime Minister's Office.
The good news of Tuesday's budget is that the finance minister could get up in the House and announce so many huge spending totals and still claim, and credibly at that, to be paying down the debt by $4 billion. Canada is doing something right that the rest of the world can only envy. Germany and most of Europe are awash in unemployment, and therefore deficits. The U.S. economy's recovery is still hanging fire, so the Bush administration's budget is in deficit both because of a slow-growing revenue base and because of aggressive fiscal responses by a White House impatient for economic recovery.
Only Canada has largely escaped the 9/11 slowdown, creating more new jobs than anyone expected. One result is a lot of extra tax revenue in federal coffers despite a significant reduction in federal tax rates. Being a fiscally responsible finance minister is partly a matter of luck, and John Manley is lucky to be in the right country at the right time.
How could such huge spending totals not bankrupt even a healthy treasury? Part of the answer is smoke and mirrors, as usual. Almost all of the spending totals given were accumulated totals over four or five or six years, rather than annual amounts. When divided by four or five or six, they do not look so large. And most of the rapid spending growth that commentators jumped on was growth in the year almost past, rather than in the future.
Future program spending increases are four per cent per year, which is slower than the growth of the economy (the government's tax base). The big increase, $14 billion or 11.5 per cent, is in the current fiscal year that ends next month. Almost all of it is already history. Not only that, but some of Canada's extraordinary employment growth in 2002 must be attributed to that very same explosion of federal program spending.
A macroeconomist is duty-bound to play Jeremiah here. First, we should all remember that the harder federal spending pushes the Canadian economy to expand output and create still more jobs, the harder the Bank of Canada will hit the brake pedal by raising interest rates. Those who think the federal budget is vigorously expansionary even after dividing all the spending totals by six should also be expecting Canadian interest rates to rise sooner rather than later.
The second warning is that a payment of $4 billion on the federal debt is trivial, less than one per cent. It is true that the relative size of the debt is what matters, and that the debt-to-GDP ratio would be cut in half by 2017 if economic growth averages five per cent a year, even if not a dollar more of debt is repaid.
However, we know for sure that by 2017 we will be worrying about the bulge in social safety-net costs to look after aging baby-boomers. The ability to run up our public debt with a string of large deficits will be part of the solution to that problem of bloated demand and a relatively small workforce to pay for it. The extra public debt will be sustainable only if we start from a low enough level, which means getting the debt-to-GDP ratio well down from its current 50 per cent before the baby-boom problem s tarts.
This budget's main flaw has nothing to do with public debt or fiscal responsibility or prime ministerial legacies. It is that the budget does not do what any budget must: it does not set priorities. The solution of giving everyone a little slice of the pie is giving everyone a little priority, which is a contradiction in terms. With the possible exception of the small-business lobby, which seemed delighted in the post-budget commentary, the reasoned reaction of most of the beneficiaries is that what they've been promised is not enough to make much of a dent in their problem.
The special $200-million contingency fund for the military, for instance, goes to pay off their deficit from the Afghanistan mission last year. The $800 million per year for the next three years does not even replace the Sea King helicopters (whose replacement, remember, was cancelled as Prime Minister Chrétien's first act on taking office all those years ago).
Winnipeg's mayor was quite colourful and heated about how far the amounts given to cities would go to solving their infrastructure problems (about a kilometer, for a city subway system). And all of us are properly sceptical about how much difference even the huge amounts of health-care dollars will make to Canadians' health outcomes.
Of course, the cynical interpretation is that Jean Chrétien was not using this budget to say what was important to him, but to prevent his successor from doing so. By raising every lobby group's sense of entitlement to federal funds, he makes it more difficult for his successor to pick and choose, as any planner must in a finite world. By announcing spending targets up to six years in advance, he reaches indecently far into his successor's mandate.
On this interpretation, which I share, we would all have been much better off if this were his successor's first budget, rather than Jean Chrétien's last.
Dr. Norman Cameron is a professor of economics at St. John's College, University of Manitoba.
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© 2003 Winnipeg Free Press. All Rights Reserved.
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