Budget 2010: Wait until next time

Being the Minister of Finance is a thankless task at the best of times and these, my friends, are the worst of times. For other ministers and government backbenchers there have been numerous opportunities for photo-ops with constituents as they announce new infrastructure programs or industry grants designed to kick-start the economy. The tax breaks announced by Finance Minister Jim Flaherty in the Economic Action Plan, however, are ancient history and anxious observers are fretting about possible tax increases.

The good news for those nervous Nellies is this Thursday’s budget is not likely to contain tax hikes. The recession is still too raw a wound and the recovery still too tenuous to risk inhibiting the slow return of confidence. What one can expect though is a carefully balanced oratory between the need to maintain the short-term stimulus against the longer-term imperative of returning to fiscal prudence — couched, of course, in language that pays due deference to the large number of unemployed and the pressing need for industrial reorganization.

No matter what the rhetoric, the reality is that the stimulus plan is running down. The financial injection into the auto industry was more than a year ago. Applications under the infrastructure program are supposed to have been closed and even the popular home renovation tax credit program has expired. Of course, actual spending will continue until all the programs have been completed but the major impetus of the stimulus is on the wane, as it should be.

So what will that mean for economic growth? If the Action Plan was truly responsible for avoiding an even deeper downturn and for accelerating the recovery, then removing that spending stream should have the opposite effect and drag down the pace of expansion over the coming period. Many economists have quite properly raised that concern, but distinguishing the impact of the stimulus is not possible because we don’t know the counterfactual — what would have happened had the government maintained its original philosophical stance and adamantly adhered to fiscal probity?

What is clear is that, globally, the reemergence of economic growth has been manifested far more quickly and with fewer false starts than many believed possible just a short time ago. Remember when the press was full of constant dread concerning the possible revisitation of 1930-era depression? Forecasts just a year or so ago focused on a deep, protracted recession — even after factoring in worldwide fiscal and monetary measures.

So either the concerted interventions around the world were a uniquely effective triumph or we simply weren’t able to connect the dots between the financial meltdown and the real world economic consequences. Truth is that the historical forecasting record of economists should push us towards the latter conclusion.

Why does all this matter in the context of the Canadian budget? The one key element promised in this budget is the vaunted “roadmap” that will show us how our fiscal authorities expect to guide us back to surplus. Spending under the Action Plan has been a major factor causing a swing to a $39.4 billion deficit in the first nine months of the fiscal year from a marginal surplus during the same period a year earlier. That only accounted for about $16 billion of the shortfall though. The rest of it came about because of large declines in revenue (corporation tax revenues were off by almost one-third) and rising employment insurance costs.

Especially in the present circumstances, the most elegantly constructed economic forecasts must contain a significant degree of speculation. Doubtless the Finance Ministry will adhere to modern tradition and eschew making predictions of their own — presenting instead a consensus of private sector growth forecasts. Whatever path-towards-fiscal-balance Thursday’s budget documents will describe won’t carry a lot of conviction. At best, what it will provide is a set of economic growth projections against which to test the prospects of returning to balance — going forward. If, in the coming months, economic activity appears to be outstripping those underlying the fiscal projections, then the prospects of reaching those fiscal goals will become more credible.

The reality is that it is still too premature to judge how much or how little economic growth will help to move the country’s finances back onside. That said, it is certain that we cannot simply grow out of the circumstances. Additional measures will have to be taken. The good news for the Finance Minister is that even in these worst of times, their introduction can likely be deferred for another year or two.

From the perspective of financial markets, the absence of any measures likely to impact investment decisions along with a well-articulated commitment towards fiscal integrity should be sufficient to preclude this budget from causing any serious apprehension.