Saturday, March 15, 2008

The Tory Deficit of 2008/09 and the end of Harper as PM

In the interest of full disclosure, I have never voted for the Tories, I hated Mulroney and I am not a big fan of Harper (although he is doing a decent job). I think Flaherty is a solid Finance Minister and while I believe that the GST cuts were stupid, I don't think he would have proposed them. That was a Harper political decision. The income trust decision was wise although it was a political mistake that they campaigned against them.

I have voted for the Liberals traditionally although I am a fiscal conservative by Canadian standards, I hate their National Daycare programs and I do not like the way Dion is shifting the party to the left. I prefer the conservative economic policies of the first 7 years under Chretien.

Canada is headed for a deficit and this could spell the end of Harper as PM.

PM Harper is a brilliant man who is always one chess move ahead of his opponents. However, this time, either he is thinking three or four moves ahead or he is making a serious miscalculation. Canada is on the brink of a recession and he had a brilliant chance to have his government fall with the February budget.

The official reserve in the February 2008 budget is for less than $3 billion. In addition, I am sure that Flaherty has a few billion hidden away as well. However, the margin for error is probably about $5 billion + or - a billion. If Canada goes into recession, all bets are off, however.

It is quite
normal for economies to go into recession. It is also quite normal for countries to run deficits in recession as revenues fall and expenses for social assistance increase. Interest rates usually fall which can help a little on the expense side.

Canada's history with deficits is not
"normal". The Trudeau and Mulroney deficits of the 1970s /80s were enormous and saddled Canada with a horrible mess in the early 1990s after a steep recession. Taxes were sky high, there was a lot of wasteful spending and deficits remained stubbornly high. Canadians became almost fanatical (and rightly so) about taming these deficits with some prodding by the Manning Reform party (of which Harper was a key member). The Chretien Liberals, with Paul Martin as Finance Minister, came to power with a pledge to reduce the deficit to 3% of GDP in their Red Book (which turned out to be a huge undertaking at the time). They proceeded to go much further and by 2000, those huge deficits turned out to be huge surpluses. Much of those surpluses were channeled to debt reduction, tax cuts and huge spending increases, all of which helped the economy. Canadians were estatic that the deficit demon was slayed and a virtuous cycle ensued. Canadians have enjoyed lower taxes, higher spending and continued healthy surpluses since. Some of the economic boom of the late 90s and 2000s was due to the tough decisions made in the 1993-1996 timeframe.

In 2000, Chretien and Martin made large income tax cuts and the purse strings re-opened for neglected social spending during the 90s. Luckily the tax cuts were timed perfectly to help Canada navigate through the 2001 US recession. By 2002, when the economic recovery began and Canada still had a surplus, the floodgates on spending began. Strong growth in the economy, in particular Western Canada, allowed Canada to have a surplus, increase spending and make a few small tax cuts.

Enter Harper in 2006, who was elected on a platform to cut the GST to 5%. Despite virtually no support from the business and academic communities and contrary to the trend in most other countries, the election promise was kept. Harper had managed to keep most of his campaign promises and do a solid job of governing the country. The economy was still relatively strong in the face of a looming US recession and the Dion Liberals have had a difficult time gaining popularity. All Harper had to do was put something that the Liberals could not accept and an election would have to be called. Sure, he is no shoo-in for a majority but a solid campaign could have done it.

Now, with the US recession worsening, it is possible that Canada will enter recession. Expect tax revenues to slow and demands for spending to increase. With a cushion of only $5 billion, a deficit is a definite possibilty. Since the Mulroney Tories left a $42 billion dollar deficit and now the Harper Tories may bring it back, it is possible that the Dion Liberals could exploit this development. They should campaign as such:
The Tories are irresponsible and only we, the Liberals, are the party of sound fiscal management. The Tories put us back into deficit for a 5% GST.

It could well be the demise of PM Harper as the current Canadian recession leads to a deficit for the first time since the 1990s. If the Liberals can actually deliver a good election campaign, they should capitalize on the huge mistake that Harper made.

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