When Liberal Leader Justin Trudeau said he would run deficits through 2020 to fund an infrastructure program and other spending, Prime Minister Stephen Harper said his opponent, “has no idea what he is talking about when it comes to these things.” For Harper, anything other than a balanced budget is an invitation to financial disaster.
Surely the prime minister would agree that the International Monetary Fund knows a little about such things. It employs hundreds of the world’s best economists and their research sets the tone for mainstream economic policy. Since its main job is to bail out bankrupt countries, the IMF takes fiscal policy very seriously. It condemns profligacy at every opportunity.
But unlike Harper (and New Democratic Party Leader Tom Mulcair), the fund’s interpretation of fiscal discipline has evolved with the times. If a country is broke, then it must run budget surpluses until it gets its debt under control. However, if a nation has “fiscal room,” deficits are the best policy, at least until the global economy rebounds to a stronger pace of economic growth, the fund reiterated this week in its latest World Economic Outlook.
There is little prospect of such an economic rebound happening anytime soon. “Prospects across the main countries and regions remains uneven,” the report said. The IMF cut its forecast for economic growth in 2015 to 3.1% from 3.3% previously. That’s not especially fast. The forecast for next year is 3.6%, also slower than predicted.
The explanations for the downgrade are familiar by now. China’s transition from a fast-growing developing economy to a more stable middle-income nation is causing lots of problems. Maurice Obstfeld, the IMF’s chief economist, observed at a press conference in Lima that China’s services industries are “booming.” That’s positive because that’s what Chinese authorities are trying to achieve: an economy that looks more like the United States or Britain and isn’t reliant on selling manufactured goods abroad. But China’s factories still make up a big portion of the the country’s economy and they are struggling from the slowdown in global demand. The IMF reckons Chinese GDP will expand 6.8% this year and 6.3% in 2016. (Those estimates are unchanged from the IMF’s previous update in July.)
We are used to China growing at double-digit rates. The U.S. is stronger, providing some offset to China’s struggles. But it is no replacement for the demand Asia’s biggest economy was generating: America’s economy will expand 2.6% this year. The global commodity boom that stirred so much investment and hiring in emerging markets and economies such as Australia and Canada was tied to China’s rapid expansion. China now is responsible for half the world’s use of metals, compared with about 20% in the early 2000s. China’s slowdown has left an excess supply of these inputs. Prices have plunged and the countries that rely on energy, commodities and metals are suffering. The IMF doubts that this dynamic will change anytime soon. It predicts that emerging markets as a group will post slower economic growth for the fifth consecutive year in 2015.
Given all of that, Obstfeld says countries must be take matters into their own hands to the extent they can. He advocates policies that will support demand and the implementation of more fundamental changes that boost productivity, enhancing countries’ ability to generate wealth. Arbitrary commitments to balanced budgets should be set aside for another day. “Countries with fiscal space and sizable output gaps or significant reliance on net external demand should ease their fiscal stance in the near term, especially through increased infrastructure investment,” the IMF said in its global outlook.
Canada has fiscal space, as the federal debt is low compared with the size of the economy. The output gap is the difference between the current level of GDP and what the country is capable of producing without stoking inflation. And Canada has a sizable one; the central bank this summer said the output gap widened as the economy contracted in the first half. Canada also has a significant reliance on external demand, as exports of goods and services equal more than 30% of total output.
The IMF’s emphasis on the output gap and export dependence as reasonable conditions to increase spending were new. Perhaps it felt to compelled to make its case more explicitly? There still are leaders out there who think they know what they are talking about, when they clearly do not.
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