Friday, March 05, 2010

A Fantasy Budget

As budgets go, the overall intent of yesterday's budget is more political than it is fiscal.

Harper's hoping that nobody will notice anything except the lofty goal of dropping the deficit to $2 billion from its current $49 billion level over five years.

Of course, that entire scenario is based on assumptions that are entirely beyond the government's direct control.

First of all, it makes the assumption that the Canadian economy will grow - and in fact outperform - all the other economies in the world. That's a lovely little bit of patriotism, but it ignores the interdependencies between Canada and the nations we trade with - especially the United States. About the only economy we trade with right now that isn't in serious trouble is the Chinese economy - and Harper hasn't done relations with China any favours.

Second, the projections assume that the interest rates for government borrowing are going to remain fairly low. This seems highly unlikely. The current trough in interest rates has been a result of trying to keep an already faltering US economy going by encouraging consumer spending during the Bush II reign. However, with EU member countries in substantial debt positions, as well as most governments in North and South America, there's going to be significant upward pressure on interest rates ... and that will affect not only the cost of maintaining the debt, but it will also affect consumer and business borrowing.

Fundamentally, it's a fantasy budget - entirely based on wishful thinking. Ironically, the government could delete better than half the deficit by simply reinstating the 1% rollback on the GST that they did in 2006. As I pointed out back here, for most people the savings in GST are peanuts - it's a rare person who can afford to shell out $20,000 in a year on things other than rent and food. (and most have to borrow that kind of money when they purchase a car!)

I'd say what Harper's really gambling on is that he doesn't expect to be sitting in the PMO in five years - and in fact won't really have to clean up the fiscal and social mess his government is creating with budgets that are mostly wishful thinking.

A government unwilling to examine and use all of the fiscal tools at its disposal is trying to run a marathon with its shoelaces tied together.

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