IS IT TIME TO START WORRYING ABOUT GOVERNMENT DEFICITS?
Canada has, so far, weathered the recession better than most rich countries. Our banks proved secure due to better regulation in the past, and our governments at both federal and provincial levels were in relatively good financial shape at the beginning, also due to past sound management.
I don't think that our government's handling of the crisis itself was the best possible, but it was better than some. The best thing would have been a massive, short-term blast of government stimulus like that which China used to end their recession so quickly.
Our stimulus spending was small and slowly implemented, but at least it was something. In the U.S., stimulus at the federal level was mostly cancelled out by state and local governments. Many of these were forced to cut spending just when it was most needed because of legislation requiring balanced budgets.
Canada has also been lucky. Our resource-heavy economy has benefited from the surge in resource demand from China and other emerging economies.
There are still dangers out there. The biggest threat to our short-term economic health is the U.S. economy, which risks being tipped back into an even deeper recession than it is in now by deep cuts to government spending.
The mess in Europe is not even close to being over, and it is being very badly handled, but it will likely affect us less.
China, which is leading the way out of the crisis, now has its very own property price bubble, which is sure to burst sometime. I hope the authorities there are ready.
In this climate, is it time to declare Canada's recession over, and start worrying about the deficit? I don't think that we should panic and that governments may need to run deficits for some time to come. But at least we can think about how we eventually get back to balanced budgets.
In an ideal world, returning to the balanced budgets or small surpluses of the recent past should just happen automatically as the recession fades. Spending on stimulus programs would stop. Spending for unemployment benefits should return to normal levels. Tax receipts should rise as companies return to profitability and workers find jobs.
But such an automatic end to deficit spending is unlikely now. At the federal level, we got permanent tax cuts and long term new spending on fighter jets and prisons. We needed a temporary deficit to fight the recession. But, unless the federal government raises taxes somewhere or cuts programs fairly drastically, we will probably still have a deficit even if the economy recovers fully.
Ontario's government was in less good shape going into the recession than the federal one, and has also given up some long-term revenue in its HST package.
This was designed to be revenue-neutral for consumers. More things are taxed under the HST than under the old system, but this is offset by other tax breaks. Businesses pay less under the new system so it presumably will cost the government.
I think we should return to running small government surpluses after the recession. Even with a small deficit, the debt can decline as a percentage of the economy as the economy grows. But we have seen the dangers of too much government debt.
Now, baby boomers like me are in their peak earning years, but they will be retiring soon. After that, we will need more and more medical care.
It is not fair to younger generations if we run up large government debts now while we are active and earning, and expect them to handle that and pay for our medical care. Now is a time when we should be running surpluses except in emergencies like this recession.
There are just two ways to get back to surplus - raise taxes or cut spending. I believe we should raise taxes.
Low taxes are great for high-earning baby boomers right now. But they hurt today's students, who are getting a worse deal on their education than we got. They hurt the poor and increase inequality. They hurt today's seniors. And they erode the health care system.
Right-of-centre politicians have a long history of promising to cut both taxes and the deficit at the same time without harming essential services by cutting out government waste. But they never seem to be able to actually do so if elected.
I hope we can get out of this climate in which it seems to be suicidal for any politician to even mention tax increases. If we want good health care, good education, good roads, and a society that takes some sort of reasonable care of those mentally or physically unable to care for themselves, we have to pay for it.
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