Flaherty: Wait Till Next Year
Posted February 14, 2014
Two documents that can have an important effect on our economy were released in the past week. One of them expresses a considerable sense of urgency. The other is in no hurry. Oddly enough both could be right.
The report of the Nova Scotia Commission on Building Our New Economy chaired by Ray Ivany is worth reading more than once, as much for its analysis as its recommendations. Above all it is a call to action by all participants in the Nova Scotian economy. On the other hand federal Finance Minister Flaherty’s budget charts no new directions, nor does it add much to the initiatives previously announced.
Flaherty’s speech began with a number of quotes about fiscal prudence from Sir John A. Mac Donald and his contemporaries. But really he seemed to be channelling Bill Davis. Davis enjoyed a fourteen year run as Premier of Ontario. When asked to explain his success he liked to reply “Bland works.”
The Conservative government’s political future relies heavily on its credibility for economic and fiscal stewardship. Until the financial crisis in 2007-2008 it was gradually reducing debt as a percentage of GDP. Canada weathered the crisis relatively well, but progress on debt reduction was interrupted by a fair dose of needed stimulus spending. That has now concluded and the debt burden is about to resume its decline.
The Conservatives like to point out that Canada has done well compared to other countries in the G-7. On the other hand, with the exception of Germany, the competition in this department is rather weak.
The biggest new initiative reflected in the budget will save $7.4 billion over six years. Civil servants will now have to pay half the cost of post-retirement health benefits rather than a quarter, an annual increase of about $290 per person.
These changes will be disappointing for the civil servants, particularly those already retired. On the other hand they still have benefits almost unknown to workers in the private sector.
Federal civil servants will also now contribute half the cost of their pensions and the retirement age for new hires will be 65. In this they are following the lead of several provinces including PEI and New Brunswick, and Nova Scotia for civil servants though not yet for teachers.
The budget provides new initiatives to help apprentices, people with disabilities or autism, older workers, veterans, and many others find jobs, but altogether the cost of these does not amount to much in the context of a $280 billion budget.
So Flaherty can be on cruise control and pretty confident that there will be a surplus in 2015-2016, and perhaps in 2014-2015.
As always much of this seems to be governed by electoral timing. For the NDP government in Nova Scotia “Back to Balance” was too little too late, and treated with considerable skepticism. Flaherty risks having too much too early. He would rather have the transition to surpluses in an election year.
If Flaherty is so relaxed why does the Ivany commission feel Nova Scotia needs urgent and transformational change?
The Canadian economy is ticking along at a satisfactory though not exciting pace. The core of the success is not the traditional manufacturing sector in Ontario. For example Chrysler, which took $2.9 million of loans and grants in 2009 when it was sick, now says it needs a further $700 million in handouts just to maintain the existing number of jobs.
Rather the national economy’s success is built around western Canada’s resource sector whose biggest problem is getting its abundant product to market. Meanwhile Nova Scotia’s policy toward many resource industries, particularly onshore oil and gas, has been diffident at best. Too much of Nova Scotia’s economy is based around the public sector.
Nova Scotia’s finances are in a precarious state, and paying for our debt will become far more difficult when interest rates return to more normal levels. Canada’s debt level is very manageable at higher interest rates.
Most importantly, Canada’s population continues to grow by more than 1% per year, adding over 400,000 people in the most recent year. Nova Scotia’s population has started to age and decline. The working age population will decline even more quickly. In the absence of radical change we will have too few workers and too little income to support both our provincial debt and our growing population of seniors.
Flaherty was not unhappy to hear his budget characterized as ”boring”, although given Bill Davis’s track record he might have preferred “bland.”
Bland and boring will not meet the challenges identified by the Ivany report. Next week’s article will look more closely at it.
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