Columnists

Duncan Cameron
Create jobs, raise incomes or balance the budget?

| March 19, 2013
Jim Flaherty. Photo: BC Gov Photos/Flickr

Canada needs to be rid of the idea that for the public good, and the general welfare, the federal government needs to balance the budget.

On March 21, in Ottawa, Finance Minister Flaherty (the best finance minister in the world according to Prime Minister Stephen Harper) will deliver his budget. He has already stated he wants to balance the budget sooner rather than later, and he grades himself, and expects to be judged by others, according to the speed with which the federal budget is balanced.

This mindset is dead wrong. Canadians would rather have a job, or a raise, than see Ottawa balance the budget. IMF figures show the federal government deficit equal to only 1.3 per cent of GDP in 2012.

The youth unemployment rate is high at about 14 per cent, a large number of people have quit looking for non-existent jobs, and many are working part-time but looking for full-time jobs. There is room to grow the fiscal deficit to close the jobs gap. The CCPA 2013 Alternative Federal Budget shows how 200,000 to 300,000 jobs could be created through a short-term increase in the deficit.

For the Canadian economy, the foreign sector sets the table for the rest of the economy.   Canadians thrive when the world economy favours our products. The current account deficit with the rest-of-the-world was equal to 4.0 per cent of GDP. This large a current account deficit suggests Canada is not keeping up to changes in the world economy.

Exports create Canadian jobs. Manufacturing exports represent well-paid work. Canada's exports to the U.S. dropped by $120 billion in one year (2008 to 2009), and as of 2012 had yet to return to levels attained in 2008. Canadian manufacturing exports dropped precipitously for forest and auto industry products, industries where workers are well paid.

Competition from Chinese exports to the U.S. and a higher Canadian dollar contributed to the slide caused by the U.S. "great recession". Good jobs were lost, and getting them back means doing more than cutting government spending and praying for a strong U.S. recovery.

While oil and gas exports took up some of the slack, future export prospects in that sector are limited, Keystone XL pipeline or no pipeline. Overall U.S. oil and gas imports have fallen, and U.S. President Obama has pledged to reduce oil and gas imports even further.

Canada's current account deficit means Canada is attracting funds from abroad. Foreigners are speculating on a rising Canadian dollar, buying Canadian bonds, and taking over Canadian companies.

The current account deficit also signals a leakage of Canadian spending into imports, which creates jobs outside Canada. 

The 25-year strategy of integrating the Canadian economy into the American economy has created structural vulnerabilities that require government action. Weak sectors reveal the need to strengthen the Canadian economy, and be prepared to use Canadian debt to do it, not foreign debt.

Under the Harper government, Canada has no strategy (other than spending over half a billion dollars on TV advertising) to build the domestic economy, which is the only way to replace the misguided reliance on a declining U.S. market.

The obvious starting point is to steadily increase public investment in Canada. Only public dollars will improve our transportation, housing, education, recreation, cultural and health infrastructure.

The Canadian government needs to increase transfers to provinces and ensure municipalities have access to public money. Transfer payments to individuals need to increase to reduce poverty and debt peonage.

Instead, the Harper government has been practicing austerity. The Canadian economy is slowing as a result, because government cutbacks have a similar effect on the economy as a drop in exports: both throttle job creation.

In Canada -- taken as a whole -- spending by Canadians, foreigners, businesses and governments occurs prior to people, businesses and government receiving income. If spending contracts, income is reduced as well, except by more than the initial spending reduction.

Specifically, unless foreigners pick up the slack, when governments reduce spending, people, NGOs and businesses get less income. Attempts to balance the budget destroy jobs and weaken the economy. Unless the economy is at full employment, austerity makes things worse for everybody.

The Canadian economy is made up of two main sectors: government and non-government (foreigners, households, NGOs and firms). When the government sector is running a deficit, the non-governmental sector runs a surplus. When governments try to reduce the deficit by cutting spending, they reduce the surplus funds available to the non-governmental sector, reducing business profits, NGO revenues and household incomes.

Government expenditure generates income. This relationship seems strange because individuals or families need to have income before spending can take place. Having wages, a salary, a loan or grant, a pension or other social wage is necessary in order to spend if you are one person or family, but this "micro" perspective is misleading.

What looks to apply from the perspective of the home, factory, farm, office, or oil rig does not apply at the "macro" level of the whole economy, where expenditure leads to income, not income to expenditure.

The government sector needs to be the leading sector, creating jobs, shaping Canada's participation in the world economy, and investing in the future. When accompanied by astute government policy, government deficits promote economic well-being.

Reducing the current account deficit, foreign borrowing, and foreign ownership makes sense. When large numbers of Canadians are unemployed, and under-employed, balancing the federal budget makes no sense at all.

Duncan Cameron is the president of rabble.ca and writes a weekly column on politics and current affairs.

Photo: BC Gov Photos/Flickr