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The $0.3 billion question

Machiavelli has nothing on these guys. Let's deconstruct for a moment the central message of today's 2011 Federal Budget, Take two: "Storm clouds are gathering in the world economy. We must rush to get our fiscal house in order, lest we be struck by another tempest. We will advance our own ambitious timetable for balancing the budget by a full year. But to do that, we must review all our programs, to find operational savings of $4 billion per year (or 5 per cent of the cost of running government). That's the kind of thing the private sector does all the time, and we will bring private sector discipline to the task."

So the budget will be balanced in 2014-15 instead of 2015-16. But wait a minute. Look back to the March version of the budget: it forecast an infinitesimal deficit of just $0.3 billion for that year. Getting that down to zero isn't actually that Herculean of a task, is it? And it certainly doesn't require $4 billion in yet-to-be-identified spending cuts.

But this got me wondering. Why on earth did the March version of the budget forecast such a small deficit for that year in the first place? $0.3 billion is about one tenth of one per cent of total revenues and spending for the government -- far lower than any reasonable measurement error, statistical rounding, or other "noise." A normal government, if they really wanted to balance the budget, would have just rounded the number to zero (or marginally adjusted one or more of the spending or revenue parameters). They thus could have claimed to be balancing the books by 2014-15 ... if that in fact matters.

Well, that budget was defeated and Canadians went to the polls. During the campaign the Conservatives issued their pledge to move forward the timetable for balance by a year. Now the budget lives up to that pledge. The strategic review process is to identify savings that will eventually deliver $4 billion per year, motivated by the desire to balance the budget a year earlier -- the rationale for which revised timetable has yet to be explained. The big debate so far has focused on the fact that the government hasn't identified the cutbacks (a point made by the opposition parties, PBO Kevin Page, and others). The Conservatives say don't worry, the review process will do that. Lost in the spin are the deeper questions, namely:

1. Why do we need to balance the budget by 2014-15 instead of 2015-16?
2. Why do we need to balance the budget at all?
3. Since the forecast 2014-15 deficit was all of $0.3 billion, why do we need a whole strategic review process and $4 billion of blood on the floor in order to eliminate it?

I am sure there is method to the Conservatives' madness here, and the fact that the debate is zeroing in on what is going to be cut (as opposed to whether to cut at all) is assisting their spin strategy mightily. My own Machiavellian theory is as follows:

-  The Conservatives left a $0.3 billion deficit in 2014-15 deliberately, knowing their budget was going to be defeated and hence leaving room for an immediate campaign pledge to move their timetable up a full year.
-  The fact that the Liberals and the NDP both accepted the initial Conservative timetable (balance by 2015-16) gave the Conservatives additional reason to bump the thing forward a year -- since they could now symbolically differentiate themselves from the opposition parties (who were now locked into essentially the same timetable anyway).
-  The coming debate over what exactly will be cut, allows the Conservatives to position themselves as the true fiscal conservatives, bringing private sector discipline to the operation of government.
-  The current budget timetable is designed to be exceeded. For example, the official budget projects only a $4 billion reduction in the deficit in 2011-12. With GDP growing and the stimulus spending being unwound, this will be vastly exceeded (just as the government just exceeded its own budgetary target for 2010-11 by a whopping $13 billion). Count on Mr. Flaherty to stand up in the Commons next year, to rousing applause from his side, to announce that thanks to his "prudent management," the true deficit for 2011-12 will come in several billion dollars lower than the official $32 billion target. You heard it here first.
-  These phony optics don't change the fact that the spending cuts will still be very painful. $4 billion in spending cuts, accompanied by normal multiplier impacts (like the estimates contained in the government's own Economic Action Plan reports) will reduce GDP by close to half a percentage point, and would eliminate tens of thousands of jobs. More likely than not, we will need that GDP and those jobs, given the storm signals already visible on the horizon.
-  But the whole "advance-the-balanced-budget-by-a-year" shtick provides political cover for the coming and utterly unnecessary pain, because tonight almost no one is asking why we would want to do this in the first place.

The federal debt as a share of GDP (the true constraint on the long-run fiscus) is already declining. The crisis in Canada is not our deficit, it's mass unemployment (still 2 million by the broad measures), corresponding hardship in households and communities, stagnant and polarizing incomes, and the risk of another round of macroeconomic turmoil.

The primary debate should not be about what gets cut, but why we're cutting in the first place. It sure isn't about converting a $0.3 billion deficit into a balanced budget.

This article was first posted on The Progressive Economics Forum.

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