Strategy

Flaherty's ostrich act grows old

In fighting the deficit, the finance minister goes after easy prey.

Budget 2010

Defence, international aid get the chop in Flaherty’s budget; government promises budget “close” to balanced by 2015.

Budget 2010

Perhaps it is because he’s already so close to the ground, but Canada’s diminutive finance minister Jim Flaherty has a knack for jamming his head into the sand just as he’s about to get slammed in the face with bad news. On November 27, 2008, Flaherty gave a fiscal update to parliament that took note of the economic storm clouds in the distance, but confidently suggested that the federal government’s books would remain in the black in the year to come.

Thirteen months later, with Canadians staring at a $56-billion crater in the government’s finances, the minister got testy with reporters who were asking for his response to a report from the Parliamentary Budget Office that predicted a federal deficit of nearly $20 billion in 2013-14. That was more than triple Flaherty’s own projections. Worse, PBO head Kevin Page claimed that the bulk of this deficit was ‘structural’ — that is, not a consequence of the stimulus spending and automatic stabilizers that kicked in during the recession.

Not at all, Flaherty said. He claimed that the deficit would be tamed mainly by the force of economic growth alone and, ‘if necessary,’ restraint in the growth of government program spending.

‘I see speculation,’ he told journalists. ‘I don’t see a lot of evidence. I see editorial comment without numbers, without analysis. I don’t get to speculate. I get to deal with budget-making.’

Well, now we have the numbers because now we have a budget, and Flaherty’s conditional ‘if necessary’ clause has become an imperative. Conceding the obvious, Flaherty now sees that we aren’t going to grow our way out of this deficit in any reasonable period of time. So the options are to raise taxes, cut spending, or some combination of the two, but what we can’t do is simply do nothing.

Wednesday’s throne speech telegraphed the government’s intentions. Taxes would not rise, and transfers to pensioners and to the provinces would continue to grow on schedule. Instead, the government waved a feeble hand some old budgetary straw dogs — freezing MP salaries and departmental budgets, while instituting yet another expenditure review in search of the twin mythological beasts of government austerity and increasing efficiency/eliminating duplication.

Thursday’s budget put some numbers to that. The single biggest element is $17.6 billion over five years in spending restraint, including anticipated lowered operating costs of $6.8 billion over the same time period. There will also be cuts in the expected rise in defence spending and a three-year freeze on foreign aid.

Most of this will come after this year. For now, there’s still $17 billion in stimulus money left to send out the door, and $2.2 billion in niche handouts, of the sort the Conservatives have been using to micromanage the electorate for the past four years. Peering into the future, the government’s annual deficits are expected to shrink to $49.2 billion in 2010-11, $27.6 billion in 2011-2012, $17.5 billion in 2012-2013 and to $8.5 billion by 2013-2014. By fiscal year 2014-2015, the deficit is supposed to be a manageable $1.8 billion.

Is any of this credible? Not in the slightest. After all, it’s worth emphasizing that every single fiscal projection Flaherty has made since he became minister has proven to be wildly, hilariously, inaccurate. But so what? Everyone knows that five-year budget forecasts are virtually useless, which is why everyone is expecting that the next budget is going to be the really tough one. The stimulus money will be spent, the economy will be back on its feet, and the truth about the long-term deficit will be a year more mature.

That’s why the deficit-fighting measures in this budget are not aimed at fiscal prudence, but at preparing the political landscape. After all, a ‘structural deficit’ is not a genuine economic animal. Instead, it’s a creature of politics, brought to life by our lack of political courage when it comes to tough decisions about what taxes to raise or what spending to cut, and by how much.

Flaherty’s plan for eliminating the deficit targets the weakest of prey in the political ecosystem: the military, foreign aid, and the public service. No Canadian will suffer from frozen levels of foreign aid, and certainly no one is going to go to the wall defending the size of the public service, its benefits and compensation levels.

But more than anything, Flaherty’s plan for eliminating the deficit amounts to kicking the can down the road and hoping for the best. Until then, minister Flaherty is keeping the spending taps open and his head close to the ground, the hard decisions put off to another day and, perhaps, to another minister.

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