In a few days our federal finance minister, Jim Flaherty, is going to unveil his “stimulus” budget and put us on the road to a $64 billion deficit over the next two years.
The only problem, it’s unlikely to accomplish much.
First of all, I suspect that Canada is not in a crisis at all. Yes, our economy is hit by a global financial crisis, where international banks, loaded with trillions of “toxic” assets stopped lending. It triggered the global economic misery and consequent drop in commodities prices. However, our situation is completely different. Our financial system is solid; our housing prices are much more sustainable with income than to the south of the border. Our economy is punched just through falling exports. So, any short-term actions to improve our economy should be focused mostly on increasing global demand on our commodities. And here definitely any government’s stimulus package will fail to deliver something meaningful. With 3% of global GDP we are not in a position to impact on global demand. Moreover, any other stimulus packages unveiled around the globe will have little positive impact until global financial system digests “toxic” assets and restores its functioning.
Second, the proposed budget likely is a mixture of infrastructure spending and tax cuts. Both of them likely will not work as expected. When newly converted Keynesians on both sides of the border propose to follow the prescription for 70 year old Great Depression, they probably forget that in the last case the infrastructure in the USA and Canada prior to the Great Depression was fairly inadequate. Thus, significant infrastructure upgrade not just employed millions of people; it also stimulated trade and manufacturing, which was the engine for next economic booms. Currently, situation is completely different. Definitely, it would be nice to have some aging infrastructure replaced or repaired; but such as we do not expect any significant advances in manufacturing, any significant infrastructure projects may employ temporarily thousands (but due to technology advances not millions) on low-paid jobs but will almost certainly fail to deliver the most crucial competitive edge, which will drive further economic development.
Tax cuts will likely have even smaller impact. Analyzing 2008 US stimulus package we can expect that most of tax savings will funnel to reduce individual consumer debt, while remaining part will be spent on import goods (e.g. electronics) rather than on domestic services. Thus, overall effect will be quite negligible.
Finally, this huge hole in the budget is a government’s panic reaction on coalition threat from opposition parties. In this case, the budget is likely not well thought. If money goes too quickly, they are wasted on poorly managed projects. If wisdom prevails and the government spends some time and thought to ensure that funds are well spent, the money arrives too late and the economy recovers by its own.
So, what to do? First of all, don’t rush and try to mimic the USA. We have a different set of problems, and they require different approaches. Second, economy definitely requires government intervention, but instead of blindly following John Maynard Keynes with infrastructure spending we have to understand his approach more generally. Thus, we have to build infrastructure, but infrastructure of the new economy. Not bridges and tunnels, but scientific centers and facilities. It will employ temporarily laid-off autoworkers, but it also employ people in long term on highly paid jobs and will eventually create competitive advantage for the Canadian economy.
And probably nothing we can do with the demand on our lumber, oil, and base metals. We either can wait until situation on global markets improves or try to mitigate its impact by building more sustainable and diverse economy.
P.S. Unfortunately, in current circumstances we don’t have a privilege to expect something meaningful and reasonable from the government. To please the opposition the government will spend our money on overpaid and poorly-managed projects and instead of enjoying the free ride on the huge US stimulus package we will dive deep into the debt.
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