Sunday, 25 January 2009

Don't borrow more - Cut spending!

Recently, two very different approaches to public finances were highlighted in statements made by representatives of two provincial governments in Canada, ironically both liberals. In Ontario, Dalton McGuinty’s finance minister Dwight Duncan announced that the Liberal government would post a budget deficit of at least $500 million in 2009 despite the fact that he is dipping into the province’s reserve funds to the tune of another $550 million.

Duncan blamed the worldwide economic downturn for forcing him to abandon a key promise in last year’s provincial election to balance the budget.

On the same day BC Premier Gordon Campbell pledged that his government would maintain a balanced budget, and that he would eliminate all non-essential government spending to do so. "We will not start digging ourselves back into the hole that we all worked so hard to get out of," Campbell promised. Campbell also announced a package of tax cuts that, taken together, should increase the productivity of businesses in his province, encourage hard work, and reduce barriers to consumer spending.

It remains to be seen which of the two approaches the federal government under Stephen Harper will follow in the coming weeks: the McGuinty-Duncan hold-your-breath-and-hope-for-the-best approach, or the Gordon Campbell roll-up-our-sleeves-and-take-responsibility-for-ourselves approach.

There are, of course, many, many factors that Mr. Harper will have to weigh in making his decision, but two in particular are overwhelming.

The first of these is the current state of public indebtedness.

Canadians can be proud of the manner in which the federal debt (accumulated deficits) has been reduced over the past decade, from more that $560 billion in 1995 to around $450 billion by the end of this fiscal year. Both Conservatives and Liberals can take credit for this.

But this is not the full picture.

Not included in the above is an unfunded pension liability of more than $500 billion, nor are other implicit liabilities, mostly related to health care, that will grow as Canada’s demographic picture changes dramatically in the coming years as the boomer generation retires. These implicit liabilities will be partially off-set by reductions in spending that will also result from demographic changes; nevertheless, the real net indebtedness of the federal government remains in excess of $1 trillion.

The picture for the provinces is even more worrisome. They will have to pay the bulk of rising health care costs, and both federal and provincial governments will soon have to deal with the costs of renewing aging infrastructure. None of this takes into account the financial strain that municipalities are currently under either.

The bottom line is this: Premier Campbell’s analogy of digging a hole is a good one, but he’s mistaken when he suggests that we have managed to climb out of that hole. We may have stopped digging – except in Ontario that is – but we haven’t yet escaped and we remain in danger of sinking further even without digging.

The ugly and uncomfortable truth is that, given the profligate spending of the 1970s and 1980s, we Canadians are continuing to live beyond our means. It may not be fair and it certainly is not the fault of the present generation, but it is the reality we must live with and overcome if we are to avoid simply passing the debts on to our own children and grandchildren.

Which brings me to the second point that Mr. Harper should consider when deciding which approach his government will adopt in response to the financial crisis gripping the world.

The movie Passchendaele is now playing in cinemas across the country. It’s the story of Canadian soldiers who fought in the world war one battle that bears its name. It’s also a tale of duty and sacrifice – the stuff heroes are made of. These were not larger-than-life figures in history; they were just average Canadians from all walks of life. Their example is all the more inspiring because of this.
Ipsos-Reid released a poll not long ago showing that 82 percent of Canadians, including 72 percent of Ontarians, support spending cuts as a means of balancing the budget. 82 percent of Canadians are prepared to tighten their belts and make sacrifices in order not to burden our children and grandchildren with the responsibility of correcting the mistakes of our parents and grandparents.

What would our sacrifice be compared to that of those brave Canadians who fought in the fields at Passchendaele, or on battlefields around the world in defense of freedom?

Mr. Harper’s duty is clear – as is all of ours. He must ensure that his government resists the temptation to return to the bad old days of deficit financing even temporarily, and he must deliver the spending cuts to make this happen. Canadians are ready to support him in doing so. He just needs to lead.

This is the battle that we must fight – and win.