Why the federal budget is poorly conceived…
Ok, ok, ok. I know it’s late and this topic has been pundited to death, but I figured I should throw my two dollars in here.
The Canadian Federal Government recently (last week) brought down the new budget. In it there seemed to be something for everyone, and like in the US it’ll take us, federally, deep into deficit* territory. Taking a look at the budget I’m going to outline the case against the new programs and going into deficit at this time.
1. They don’t really know what will work
- Throwing out dozens of new initiatives smacks of desperation, not solid economic sense. In the end the economy will improve and someone in the government will take credit for fixing it, even though they will have no idea what, if any, of their programs made a difference.
- The best way to get the economy moving is to improve confidence, which will improve investor risk profiles, loosen credit, get people spending again, and generate profits. Since this massive increase in spending smacks of fear (of a poor economy and an unwanted election), it’s not likely to even have a placebo affect on confidence.
- An analogy from the NY Times (extended by Greg Mankiw) states:
- Doctors who spent more - on extra tests or high-tech treatments, for instance - didn’t get better results than their more conservative colleagues. In many cases, patients of the aggressive doctors stay sicker longer and die sooner because of the risks that come with invasive care. … Just like economics!
- Small stimuluses have a solid track record of not working, so a large collection of small stimuluses is likely to fare just as well.
- Keynes himself is quoted as saying that that public projects are not very good remedies to combat the business cycle. If everyone believes that Keynes is purely about spending nations out of crisis they should do more research.
2. The deficit amount is much higher than likely needed to stay in power
This projected budget, carrying it’s cumulative deficit of around $90 billion is certainly well below what the Liberals would have been comfortable propping up. Michael Ignatieff has no interest in precipitating an election as he knows that there is nothing for the Liberal Party to gain from such a move. Hence they could have gotten away with less. The Conservatives cannot really blame the Liberals for the size of the budget.
3. You can’t spend that much more money quickly and efficiently
The government may have budgeted for a significant increase in public works, but either the money will take a very long time to be properly allocated (a US report as an example) or an inordinate amount of it will be wasted as was done with the huge spending hyperactivity in Iraq over the course of the current conflict. You really can’t have it both ways. Since our current government bureaucracy is tooled to deliver the current (2008) amount of largesse for projects, any significant increase will require increased bureaucrats (rarely a good thing), or the money will be sent out the door without adequate checks and balances.
4. It will increase national debt and associated costs
Currently (@ 2008) the Canadian federal debt is running at about 29.9% of GDP, and takes up about 13.6% of Federal Government revenue to service.
With an announced $89.4 billion in cumulative deficits over the next few years this will increase federal debt to $541 billion and increase debt servicing costs to approximately $16 billion per year. This means that by the end of this cycle of stimulation, the government will be paying almost $500 per capita every year on debt servicing with a per capita debt of $16,300 or about $65,000 for a family of four. And those numbers don’t include the huge debt burden that the provinces and municipalities have to pay.
This money will need to be paid sometime and will continue to reduce the amount of money that can be returned to taxpayers via tax breaks or program spending.
This said, there is a very real chance that things won’t go as planned - like things changed radically in late 2008 - meaning that the deficit projection stands a very real chance of not coming out at the level budgeted for.
5. General problems with Canadian government spending
- None of the new spending seems to be related to long term improvement of personal asset/wealth generation, the base driver of the economy.
- There is little evidence that much redistribution of wealth, i.e. increased taxation and transfers, actually improves the lot (read: happiness) of people.
- Increases in government size directly erode the incentive for individuals to be charitable on their own, instead letting them coast on the highly inefficient government wealth transfers.
- Increases in transfer payments continue to reward jurisdictions that are incapable of creating an economic climate conducive to personal wealth creation.
The one current bonus in this whole thing is that the failure of the coalition and the current budget has really pissed off the economically feckless NDP.
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* A little bit of background:
- deficit generally applies to a net government borrow in a specific time period.
- The national debt is the net accumulated deficit at any point in time - i.e. the amount of cash that the government (i.e. you) owe to our various lenders.
- The national debt is different than net national debt - net national debt also includes the value of any assets, including property and securities, held by the federal government. Not a very useful number since the value of the assets, especially right now, is in serious flux.
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