Allow me to indulge myself just this once. Almost exactly one month ago I wrote a post arguing that the Bank of Canada was being too optimistic about our economic prospects in the July Monetary Policy Report.
Yesterday, both the Governor (and Finance Minister Flaherty) conceded to the House of Commons Finance Committee that the outlook is indeed significantly less rosy than they had thought just one month ago.
I don't claim any great prescience. It's just that the dominant macro-policy frame -- that we can build a decent recovery on rising investment and exports as Canadian governments at all levels retrench and as austerity bites in key markets in the U.S. and Europe already in the grips of deleveraging -- just doesn't add up.
Which is why we need to be having a debate about fiscal policy and the need to shift from austerity here at home to public investment--led growth.
Unsurprisingly, both Carney and Flaherty refused to embrace the scenario of a double dip recession, even though that is what is driving the stock market crash and the collapse of U.S. and Canadian bond yields.
I was, however, glad to hear Carney talk about the need to use low interest rates to support investment rather than increased consumption. It's just that it will have to come from the public rather than the private side. A propos of government spending, he said that "smart spending will continue to be important." A crack in the door?
And, while reiterating his plan to eliminate the federal deficit through spending cuts, Flaherty left the door very, very slightly open to a change in fiscal policy should the outlook further darken.
"If we were to see the situation globally deteriorate in a dramatic way, we would obviously do what is needed to protect our jobs and economy and families in Canada. We would act in a pragmatic way, as we have done successfully, previously and recently."
In that context, I commend to his attention the CLC pre-2012 Budget Brief to the Finance Committee.
Here we underline the deterioration of the economy against the backdrop of a still weak job market, and call for an end to spending cuts and a major new public investment program.
"Given the very weak economic recovery and the damaging effects of planned cuts to federal programs, the brief argues that federal government program spending should be maintained at the current (2011-12) level as a share of the economy, and that the Strategic and Operating Review should be cancelled. We support continuing review of the efficiency of government programs, but any savings should be directed to financing new priorities, such as an improvement in the Guaranteed Income Supplement and Employment Insurance benefits, as well as job creation programs, and a national child care and early learning program.
It is proposed that the federal government should introduce a major, multi-year public investment program to create jobs now, and to promote our environmental and social goals while also boosting private sector investment and productivity. Up-front costs should be funded through an increase in the federal corporate income tax rate to 19.5%."
Let the debate begin!
This article was first posted on The Progressive Economics Forum.
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