Passing the anti-recession test

CTV news is reporting [2] that the Conservative finance minister will announce a $40 billion deficit in his budget speech January 27, the day after the House (finally) reconvenes. The priority for a frightened Stephen Harper is to convince the Liberals the government is prepared to stimulate the economy. Leaking "big" numbers to CTV is one way of manipulating public opinion. Having Canadians believe we can at last trust the Conservatives to fight the recession puts pressure on the Liberals to support Harper, rather than take power with the NDP, and introduce a true anti-recession program.

A look at the U.S., now in recession, where the budget deficit has been super high for years, suggests there is more to recession proofing the economy than a big budget deficit.

For the upcoming budget, ask three questions to know if a serious effort is being made to fight the downturn.

Question one: does the government understand that it is through no fault of their own that many people lose their jobs and livelihoods, and that Canadian workers need to be insured seriously against the risk of income loss, or does it plan to keep giving insurance premiums to companies for "re-training" instead?

Question two: does the budget contain new spending measures at least equal to two per cent of GDP, or is the stimulus supposed to come from tax cuts?

Question three: is the government counting on the rest of the world to bail Canada out, or does it plan to contribute to an international plan to combat a worldwide recession?

On jobs, the Conservatives and the Liberals have both bought into the idea that people become unemployed because they have priced themselves out of the job market. Work for less, and you can find a job. That is why successive Conservative and Liberal governments cut unemployment benefits, and tightened eligibility rules, to force people to take poor paying work. Then provinces followed suit, and cut welfare. So guess what, Canadians were forced to work for less. The result is many more people are having trouble in making ends meet.

Thanks to wage levels remaining low, consumer spending is not going to lift Canada out a recession. Leaving the unemployed without adequate income makes things worse for everyone, including the businesses that fought to weaken unemployment insurance.

Conclusion: without significant improvements in benefits for the unemployed, the budget fails the recession fighting test badly.

With a rising unemployment rate, and falling consumer spending, governments at all levels must spend more. First, through investment in concrete projects which provide jobs and good incomes. Second, through increases in transfers to persons: spending on pensions, support for aboriginals, grants to athletes, artists and students, employment insurance improvements and new transfer programs for child care and early childhood education. Putting new money in the hands of the people that will spend it has a positive multiplied effect on the economy.

The CCPA alternative budget [3] should be the benchmark for new spending: stimulus equal to two per cent of GDP or about $33 billion. If the government argues that its deficit provides stimulus, consider the following. One dollar of new spending generates $1.50 in GDP growth, while one dollar of tax cuts generates only about 60 cents in GDP growth. Tax cuts slow the economy, while new spending quickens economic activity.

Major bank economists just held a press conference [4] to call for yet more new tax cuts, on top of the ones implemented over the past few years. Why? Because the tax cuts will be saved i.e. put in the banks the economists work for. While banks like to build up deposits, an increase in savings creates more economic weakness.

Conclusion: If the government adopts a tax cutting strategy, not a new spending package, it fails the anti-recession test.

What makes the current situation risky is that the recession is worldwide. Canada can play a leading role in promoting a virtuous circle of new spending, and foreign exchange stability in the major economies of the G20. Most importantly, Canada should be working to prevent spending restraint, and competitive currency devaluations. Allowing a vicious circle to develop, in which countries try and promote their own exports, while limiting imports from other nations, leads directly to the international transmission of recession from country to country.

Conclusion: if Canada neglects international measures to deal with the worldwide recession, or, worse, signals a weak dollar policy, it fails the anti-recession test.

When the House resumes business the over-riding priority is a government prepared to fight the recession. If the budget fails any of the three anti-recession test questions, the Harper government must be defeated and a coalition government formed.

Duncan Cameron writes from Quebec City.

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