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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
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
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
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
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
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.)