March 5, 2010
By Todd Hirsch
Alberta Business Columnist
CALGARY, AB, Mar. 5, 2010/ Troy Media/ –Federal Finance Minister Jim Flaherty 2010 budget, released yesterday, announced the largest deficit on record ($53.8 billion) for this fiscal year, with five more years of deficit spending to come – and that’s only if everything in the economy rebounds as the government hopes.
Yet, despite this really gloomy news, investors yawned, the Canadian dollar edged a bit closer to parity with the US greenback, and no one, other than the opposition leaders (who are required to be outraged by any government budget) seemed too upset. On balance, reaction was actually quite good.
How can this be? Was it in fact a “good” budget?
Budgets are political documents, not economic ones. The budget is a chance for the government of the day to set out its course for managing taxes and spending over the coming years. They present it to the electorate, put their spin on how great it is, and hope that the opposition parties will swallow it (especially in a minority government like we have now). In this respect, as a political document, the budget was perfectly acceptable.
Market reaction muted
While no one is pleased with the $53 billion deficit we are currently facing, the number surprised no one, and that is probably why market reaction was so muted. These days, governments are much more forthcoming about budget information prior to their release than they were in previous eras. In the weeks and months leading up to the March 4th budget, the federal government has gradually released “trial balloons” to the markets to gauge reaction. So by the time the budget is released, nothing comes as a surprise. That is probably for the best.
But markets also had no (or perhaps slightly favourable) reaction to the budget because Canada remains the global example of fiscal management. The $53 billion deficit isn’t great, but it amounts to only 3.5 per cent of our national GDP.
Our debt-to-GDP ratio – which is really the best and most appropriate way to gauge if the debt is sustainable – is expected to peak at 35.4 per cent in the coming year, and fall to 31.9 per cent by 2014 – 15. That is only slightly more than the low of 28 per cent or so that it touched in 2008. And it’s far lower than Canada’s debt-to-GDP ratio of 70 per cent in the early 1990s.
Comparisons to international neighbours are even more telling. The US deficit, this year alone, is expected to be close to 11 per cent of that country’s GDP, and the total debt-to-GDP ratio will be cresting close to 100 per cent within a few years. Ditto the United Kingdom. Greece’s ratio is already 120 per cent, and Japan’s is close to 200 per cent. Even with the $53 billion deficit this year, Canada remains well below the average ratio of debt-to-GDP among the G8 nations.
Fulfilling its commitments
The budget was also commendable in that it fulfills the commitments made last year around stimulus spending – and also made it clear when that spending would end. Another $19 billion will be shelled out in infrastructure spending, jobs training, and support to industries in Year 2 of what the government calls “Canada’s Economic Action Plan.” Reasonable people could argue whether there was merits iin such stimulus spending in the first place, but the fact is the government announced it last year, committed to it, and is following through exactly as planned. No surprises here, and that is good.
The budget also outlined $2.5 billion in cuts to the military (which probably would have happened anyway given the 2011 timeline to exit Afghanistan), as well as salary freezes to MPs and federal public employees (always a politically popular move). Other than this, though, we are left wondering where more cuts may come from over the next five years if economic growth and rising revenues alone do not erase the deficit.
Overall, to ask if it was a “good” budget is perhaps the wrong way to phrase it. No one likes a $53 billion deficit and five more years of red ink – least of all Prime Minister Stephen Harper. But given the fragile economy and the reality of how Canadians have come to depend on government services, it was acceptable.
And HEY . . . at least we’re not Greece, or the US, or the UK, or Japan . . .
Todd Hirsch is Senior Economist with ATB Financial.
Channels: The Calgary Beacon, March 7, the Spruce Grove Examiner, March 12, 2010