Little comment on budget direction

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Sean in Ottawa
Little comment on budget direction

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We are hearing reports that the Conservative budget will focus on tax cuts
as a way to stimulate the economy. Unfortunately this is not being debated
enough; certainly not the difference between tax cuts and stimulus spending.

Most other countries are providing stimulus packages with spending to help
the vulnerable, restore infrastructure and measures to create jobs-- the
Keynsian approach people often refer to. This is what we have been told to
expect.

 Instead, following previous policies of letting the chips fall where
they may, the Conservatives are now publicly mulling further tax cuts when they
are already in the red. This of course will set the stage perfectly for a
"we have no money" response to any request for help by those who need
it in the short term and a serious deterioration of the federal government's
economic ability to do anything other than belt-tighten in the longer term.

Tax cuts to those who are employed are of little value, most people are
nervous of the global recession and wild spending by consumers would be
reckless. Stemming job losses is the current economic emergency here especially
as higher paying jobs vanish. For a time lower paying service jobs will pad the
employment stats masking the true losses.

Rather than tax cuts this money ought to be spent as other nations are doing
on infrastructure, public supports for people who are in need, support for
public health and education including addressing the shortages of nurses and
doctors, and direct specific interventions to assist the maintenance of
Canadian jobs where the long term prospects for those enterprises hold promise.
With a new round of tax cuts the government is taking these necessary
expenditures off the table and or dooming this kind of spending to failure.
That failure will be two-fold: the room left for this type of spending will be
too little on the one hand so the focus on stimulus will be blunted and
inadequate; by erasing the government's ability to provide this stimulus
prudently, the cost to the government will be disproportionate to the benefits
created such that not only is the ability to maintain or bolster any
stimulus  compromised but the government will need to belt tighten at a
time when this will put a further drag on the economy which cannot pick up the
slack.

Remember, Keynsian economics prescribe government spending in times of
difficulty and government savings in better times. This also means the
government effectively buys when the market is low and sells when the market is
high. Our government is also looking at dumping assets into this fragile
economy further depressing private asset sales when there is little money
around while getting bottom dollar for national assets. This is a move designed
to hide the real decline in government finances.

 This combination of inadequate stimulus, further tax cuts and
below-value asset sales will add up to a big bill to Canadians over a long term
without providing the desired effect -- lifting the country out of recession.
Essentially it is a combination of trickle down spending and direct stimulus
that has no chance of success as it tries to go in two directions at once.
There is little reason to believe that spurring consumer spending now would be
wise advice to Canadians at the start of what could be a long period of
economic decline now expected to run into 2010 and even less reason to believe
they will take such advice. So why is the government doing this?

Like everything else this government does, it is politics. More on that coming.

On the one hand Canadians want stimulus because they have seen it happen
elsewhere and are sold by economists on the idea. Unfortunately they do not,
for the most part, understand the role of tax cuts or that additional spending
and tax cuts are two different directions with one potentially undermining the
other. Conservatives themselves have usually claimed to have coupled tax cuts
and spending reductions not spending increases (although at times they have
actually increased spending, often with significant military spending
increases). By posting a larger than needed deficit due to tax cuts, the
financing and credit of the government is at risk even with more modest than
required spending.

We have seen this before: when the government borrows excessively they drive
up interest rates and drive down the dollar. This naturally raises prices for
foreign goods. This can lead to an increase in the cost of imported consumer
goods while in the context of a recession, Canadians can't get benefits from
added sales in spite of a lower dollar (a lower Canadian dollar now won't get
the ravaged US economy to buy our goods -- that's a policy for when there are
potential markets to exploit not when we are in the market to buy necessities).

This is a recipe for stagflation (where the economy is stalled but inflation
is rising).Thanks to this county's short-sighted dependence on oil revenue, our
dollar is forced upward choking potential sales when they are possible and
downward when these sales are not possible but we need to manage import costs--
this is one of many costs of the de-industrialization of our country that we
have seen over the last few years. Union leaders in Canada have been screaming about
the hollowing-out of our industrial structure, there may be nothing left before
they are recognized for their foresight.

The purpose of tax is of course to allow the running of the government,
allow for collective enterprise (many things are more efficiently run with the
volume of national purpose rather than the individual and some things can be
done in no other way) and attend to the social needs of the population. Another
purpose is to moderate economic winds by tilting against an economy moving too
quickly by spending less and by spending more pushing an economy moving too
slowly. By cutting taxes now, the government is reducing its capacity to do any
of this. Tax cuts are not intervention, they are a rejection that government
will intervene in a faltering economy. Few economists would argue that
consumers, on an individual basis can be stimulated in the current economic
climate, the claim that they can is an outright fraud from the finance
minister. His real objective is to stymie government spending in the longer
term (an objective he has admitted over much of his career).

But, as I said this is political, practically devious. The current
government does not believe in intervention and needs to respond to a
population crying out for it. The government as it hinted late last year really
does not want to stimulate the economy and in spite of political pressure has
not changed its mind. These tax cuts are designed to add dollars to the
government's claim of economic stimulus without intervening in the economy more
than they absolutely have to as they are ideologically opposed to such
stimulus. Instead they chose to redefine tax cuts as direct rather than
indirect stimulus and mislead Canadians into believing the time for one is the
time for the other. And if the population is unable to understand what these
cuts mean they may get away with it. So we could see a small $5 billion
stimulus inflated, for sale to the public, to a $20 billion package including
the tax cuts. The government gets to advertise a big stimulus without having
one. And the long term is even better:

With the tax cuts, the government now will have the reduced fiscal capacity
required to say "no" to many things people need and even the right
climate to once again attack the democratic process by going after public
financing of political parties. If they lose the next election, the next
government will have to deal with the infrastructure deficits due to inaction
now, a federal deficit created by tax cuts and have no money to do so.
Essentially, they are proposing to bankrupt the federal government or, more
accurately, make it insolvent, unable to meet obligations which will have to be
realigned to match Conservative ideology regardless of who is in power. The
next government will not have the room to do more than continue cutting as the
government finances slip into the same type of position they were in years ago.
Only in a second term could a new government restore the social supports to the
economy and the Conservatives are counting on them not getting that second
term.

Yes, this is a nightmare in almost every respect repeating the errors of the
1980s (and possibly repeating what happened to a progressive government in Ontario in 1990 where
there was no room to maneuver and the situation led to the defeat of the
government before any social support could be restored).

The only thing missing from this scenario, so far at least, is high interest
rates. What would cause that? Experts say high interest rates are caused by a
high demand for loans when savings are low. So massive government shortfalls at
a time when consumers have high debt is one risk. When the government goes
shopping for foreign currency to pay the bills, interest rates go up and the
dollar down. When this happens you have inflation as we import a lot. With a
low dollar our government debt offshore increases in size, and inflation sets
in as imports rise. The solution? Raise interest rates further to attract
capital back to Canada
to stabilize the dollar. We have seen this treadmill before. Of course there is
one more attraction this time. We never renewed our social supports or
infrastructure since the last time so both are much weaker than they were in
the 1980s when they were 10-20 years old. Now they are 40-50 years old. An
aging population with greater needs and a greater potential vulnerability to
savings erosion through inflation provide further complication.

Conservatives have good reason to hope Canadians sleepwalk through
this. On the political side it helps them perhaps stay in power for a long time
(assuming they are not caught on this deception), on the ideological side they
will have severely damaged the role of government, even if other parties get
control of it, and lastly they will have set the stage for public acceptance
for policies the public now won't accept: two-tier medicare, massive social
cuts etc.

Don't let them away with this; speak to your friends get people talking: tax
cuts now are not a replacement for stimulus.

 (I am aware this is long but as a new thread, I am not derailing
anything and hopefully there is something here to discuss. I know this could go
in the article section but felt it too topical to not put here- apologies if
this is a mistake.)

Sean in Ottawa

Yikes - didn't realize that the code would come in copying it back and forth from word (used spell checker as my firefox spell check didn't seem to want  to kick in). Now I find I can't edit out the extra crap code-- can a mod go in and do that?

JimWaterloo

An interesting read in our local paper. The local chamber of commerce was telling the local Conservative MP that they do not want any more tax cuts.

http://www.waterloochronicle.ca/news/article/158289

Brian White

Similar stuff in the times colonist here in victoria. Mostly economists do not want the tax cuts because the rich just pay down their houses quicker with the free money (I forget the figures 80% or something like that). So nobody in the real economy benifits at all! so we get a broke government and rich people get richer!  With directed government spending we get a poorer government but at least people have jobs fixing the potholes, planting trees (tree planting firms laid off lots of staff in the summer even though there are millions of hectares needing PROPPER replanting (NO monoculture this time!) So you have a choice,  the conservatives: the rich pay down their mortgauges amid huge unemployment and a broke government  or the coalition: more employment, no tax cuts and a deficit that will be smaller sooner (because people will still be working and will still be paying tax).

So the choice is jobs or pay down the houses for the wealthy!

Fidel

Here's a little comment on the stimulus end of the budget which the Harpers said they'd already considered with tax cuts

Job creation better than tax cuts

Quote:

A tax cut has nothing on a job, especially when you've recently lost yours.

But this week Finance Minister Jim Flaherty hinted tax cuts will probably be part of the Jan. 27 budget, "as another way of supporting the economy."

Those cuts need to take a back seat to infrastructure and any other spending that will create jobs, especially at a time when people are more likely to save money resulting from a tax cut than spend it.

Would you spend a tax cut at Canadian Tire and local businesses, or would you salt it away in an offshore bank account, "shorting the peso", a winter home on the Riviera, or a foreign made sports car?

Sean in Ottawa

It isn't just rich people who would not spend the tax cut. Middle and lower income people who feel nervous will pay down debt. nIce in a way but certainly no stimulus and nothing for thoise who are unemployed.

I am glad to hear that this is starting to get reported. I have been worried about this going back to the start of December when the parliament was shut down.

Unlike spending tax cuts are also permanent and many are completely useless.

Interestingly I hear the US is going down this road as well so if they screw up we will have an even longer period to suffer in this.

thorin_bane

They are skimming for public reaction to the idea of a tax cut. If it isn't too much outrage they will implement a big business one.

KeyStone

It's amazing how the Conservative solution to everything is tax cuts.
If the economy is doing well - let's bring in tax cuts because we can afford them.

If the economy is doing poorly - let's bring in tax cuts because the economy needs them.

Employment is high - let's bring in tax cuts because we have the extra revenues.

Employment is low - let's bring in tax cuts because it will create jobs.

Is there ever a time not to give tax cuts? What would have to happen before we would raise taxes?

SCC

Here are some interesting proposals: 

http://www.policyalternatives.ca/reports/2009/01/reportsstudies2065/?pa=BB736455

And they appear quite doable, without jeopardizing any long-term public finance equilibrium. 

 

SCC

And they address issues that always seem to be left aside such as poverty, the situation of the elderly and the environmental future of Canada.

Sean in Ottawa

Thorin Bane and Keystone-- you are both dead on.

This is where the NDP needs to focus its messaging now because if people accept this fiction while we are preoccupied with a coalition idea the Liberals, Cons and other right wingers will laugh all the way to the bank while the NDP acts as if it has no independent representation in parliament.

We need to explain that the direction needs to be direct government spending not tax cuts that cannot stimulate the economy in the current climate and run with this. This is the first time in a long while the NDP is alone on-side with almost all the major economists and we are squandering this opportunity and letting down those who need us and who believe in something other than tax cuts if we do not get back to being an opposition party rather than one that thinks it has a deal with the Liberals, a party we usually accuse of lying and lacking principle for good reason.

Everyone but NDPers seem to see the Liberals are just playing us as a predictable bargaining chip while they negotiate their own version of a right wing budget. And in fact they will get a small amount of direct spending that they will claim they helped force while the NDP was irrelevant.

Fidel

I tend to think the NDP were able to achieve good things with federal Liberals in the 1970's.

The Liberals were led down the treacherous path of neoliberal ideology by vicious toadies to a US agenda in the Tory party and rightwing think tanks and council of big business CEO's in Canada.

Those misguided economic policies have led to the current crisis emanating from that source country of the whacky economic ideology and our largest NAFTA partner, the USA.

The Liberal Party of Canada has to change course on their previous policies, or they will become ever more irrelevant and with record low standing in voter support on the horizon if they adhere to the now failing neoliberal policy agenda. And I think Ignatieff understands this.

 

 

Highlander

Sean,

You may be correct about the Liberals manouvering but in the end, the coalition offers them one thing that the Tories can not - power.

If the Liberals really are the cynical opportunists that you are suggesting, and I think they may well be, then return to my first point.  I still think that when the time for action comes, that prospect will be enough to get them to follow through with thier signed pledge.

Sean in Ottawa

Highlander-- I never said the coalition idea was somethign we should completely give up on. I did say that as long as the Liberals are not on side we should not have it as our main focus.

I am not convinced as you and some others are that a defeat of the government will result in a coalition government rather than an election and I am not even convinced that it could go very long without an electoral test. I am also not convinced that Ignatief wants power right now-- I think he is satisfied with doing that a little later. He does not want a temp job at 24 Sussex he wants to win an election-- he at least understands the difference.

What disturbs me most is when I consider each party's best options:

For the Liberals-- let Harper wear this problem a little more as they won't have to support a budget that is unsaleable to Liberal supporters as Harper will make the concessions required to reach those supporters as they are also potential Harper supporters. The Liberals got their terrible result based on a plan and leader that was a nonstarter. They will suffer in each budget year with that result until there is an election. There is no reason to assume the Liberals would not do better under Ignatief than they did under Dion. There is a reasonable chance the Liberals could take some seats off the seperatists in Quebec especially as the Conservative vote declines as well, some from the NDP perhaps in Northern Ontario that in part was protesting the Carbon tax and some from the Cons, especially in the rest of Ontario. This could put them short of a majority by the number of seats the NDP retains and a much stronger negotiating position in that coalition that would no longer include the support of the BQ which the rest of Canada, mostly, does not want associated with the coalition even as loosely as they were. I think Ignatief could have a chance at an outright win here if the BQ faltered. The NDP is unlikely to gain much more Liberal voters based on a rightward shift than they gained based on Dion's weakness and the carbon tax. The NDP might in places regain some support lost to the Greens which may be seen as less than a player in the economic crisis especially since they did not manage a single seat last time.Nowhere in here is there a compelling reason for Ignatief to back the coalition which is widely percieved as dependent on the BQ when he can get enough concessions out of Harper to gain a few months. Likely the Liberals can force an electionover asset sales which will be an ongoing problem with this government.

Conservatives: it is not in their interest to go to an election right now and they do not want to give up power. Likely they will indeed make the concessions required to bring a right-wing Liberal on board for a while. While the Liberals will believe they will get stronger the cons will use that time to try to strengthen their hand. Neither of those parties really wants a deal with the BQ or NDP and neither wants an election so they have few choices. Harper knows he will have to give Ignatief somethign significant for him to save face and not look like Dion-- and for the time being that is in his interest. 

The BQ can bail on the coalition at any time if it does not actually take power. Their objective has to be for now at least to avoid an election. They are probably happy to see the Liberals support the budget and take this thing off the table. Then they will have free hands and more important time to prepare as an election now would be a major problem with the workers and donors fatigued by a back to back federal and provincial election.

The Greens: they have no cards to play at all in this-- publicly they can try to take back the "Green share" lost to the Liberals under Dion but that's it and I don't think they have much hope of success for now.

The NDP as I said needs to come out at the leader on the economy for working and vulnerable people, needs to be proactive. Taking partial power in a coalition is not in the cards when you look at the other parties' options. With the party of the Coalition mantra and debate there could be time to address parliamentary objectives and work to make strong connections to the public on key issues. A new platform for an election needs to be built and sold-- in parts to Canadians as the old plan simply does not add up any more in the current climate (just as the other parties' plans are similarly obsolete).

 

Fidel

The federal NDP's "old plan" that was scoffed at by neoliberal ideologues for years is looking pretty new to me, and especially when we consider that following second-hand U.S. policies has brought us to where we are today.

Sean in Ottawa

Ok but it needs to be tailored for this situation with any updates and then presented to the public. Silence is not an option now.

Boom Boom Boom Boom's picture

On Newman's show tonight Elly Aborhim (sp?) from Carleton U said the NDP and BQ both will find probably nothing in the upcoming budget to support, so it will be up to Iggy to decide whether to abstain, or vote for or against. Earlier on the show, Scott Brison said the Coalition remains a hammer that the Liberals can potentially use, so it appears the Libs are holding the threat of using the Coalition in reserve.

Fidel

Sean in Ottawa wrote:
Ok but it needs to be tailored for this situation with any updates and then presented to the public. Silence is not an option now.

The NDP only has so many resources to campaign with.

But if we know the NDP, it's a good bet that they have strongly opposed whatever second-hand neoliberal policies forced through parliament by phony majority governments over the last three decades. That's a general rule to the NDP's economic policies which look better and better, at least as far as I am concerned, with every bit of bad news reported on the economic and financial front in North America.

The neoliberal policies tend to affect every fine detail of our now faultering economy in Canada.

The NDP has said that we are going to lose 18,000 jobs by sending unprocessed oil from tar sands to the U.S. We need a national energy plan written by elected Canadians not CEOs of big American fossil fuel companies robbing Canadians blind for years and years.

The NDP has said Canadians need jobs creating, and that's because the private sector has been such a washout in Ontario over the last number of years. We're creating more public sector jobs than private in Ontario for two or three years now.

Since the neoliberalarama with Mulroney-Chretien-Martin, Canada has a $130 billion dollar infrastructure deficit. This would be an excellent starting point for job creation across Canada.

There is no shortage of dilapidation, rot and decay across Canada that needs tending to and money spent on. We have to remember that if the feds dont spend the money, they'll sell public assets and services off to their friends on the cheap. And whatever financing those people need to make things work, they'll borrow the money at whatever interest rate they can scrounge and tap Canadians for it with shitty services and slave wages for workers. Does anyone need reminding of just how shitty-awful the neoliberal nightmare has been for workers around the world?

NorthReport

Brace for a big, 'comprehensive' budget: Harper

http://www.cbc.ca/canada/story/2009/01/09/harper-budget.html

 

Translation: Brace for massive corporate tax cuts.

 

"Harper said the government has been involved in heavy consultations leading up to the tabling of the budget on Jan. 27"

 What labour groups is Harper refering to? Laughing