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Title: A politically savvy budget

Subtitle: Canada’s stronger economy means fewer austerity measures were needed.

 

Budget announcements in Canada are major events. In the United States, negotiations between Congress and the executive branch unfold over weeks. Here the tabling of the budget takes just an hour. But during that time entire country takes notice, giving the government an opportunity to set an economic tone for the coming year.

 

This time around the Conservative government delivered a politically palatable document that nevertheless included considerable austerity measures. A quick look at how they did this provides a good window into how economic policy is made in Canada.

 

The government’s first astute move dates back to the consultation period leading up to it, during which various spokespersons let out the word that a series of tough measures were in the offing to get Canada’s deficit in line.

 

However when the actual cuts were announced, though large, they were smaller than expected. As a result, special interest groups such as public sector unions and student associations, who opposed specific measures had a hard time getting traction with a public relieved that it was not hit harder. The upshot was that the overall effort was greeted with a sigh of relief.

 

Far from a watershed document

“It is far from a watershed document,” noted Douglas Porter, deputy chief economist at BMO Financial Markets, in a comment typical of many of those which emerged in the ensuring days. “Restraint measures are relatively moderate and are partially offset by new steps to support employment and business investment.”

 

While the Conservative government has been in office for several years, the budget that Finance Minister Jim Flaherty released was the party’s first from a majority position. Without the need to rely on other parties to get it through, the budget thus provided an excellent indication of where it will be going. All indications so far are that the government is trending towards a pragmatic and politically savvy approach.

 

For example Flaherty began his speech with a classic sleight on hand, announcing an irrelevant economic move – the elimination of the penny – to give everyone something to talk about, before moving in to announce his austerity measures. These include cuts in the growth of transfer payments to provinces for health spending, promises to limit lavish civil service pensions, and reductions in the number of government workers. However newscasts that night led with images of pennies being minted, as opposed to interviews with workers who feared losing their jobs.

 

In another effective political move, Flaherty raised the eligibility limit to collect Old Age Security from 65 to 67 years. However the move will only fully take effect in 2023 - after the politically powerful baby-boom generation has started collecting. This was smart, because those who will be most affected, the country’s youth, Generation Ys, are too poor to make financial contributions and form too small a voting block to make an impact.

 

This sleight of hand in fact provides one of the most important lessons for interest groups: if you want government to think of you at budget time, better figure out a way to organize and promote your interests. Boomers, and older Canadians in general, who control all of the levers of power, are able to do that. The young can’t.

 

Shifting the burden to the private sector

Much of the reason that the government was able restrain austerity measures to the degree that it did and to avoid announcing any major tax increases, relates the fact that the Canadian economy has been doing surprisingly well of late, adding for example 82,300 jobs in March. This resulted in stronger than expected revenues as Canada emerged from recession. As a result deficit targets from previous budgets were revised downwards, with the projected shortfall in fiscal 2011-2012 cut from $31 billion to 24.9 billion.

 

In all, the new budget seems to be an effort to help ease the country away from the fiscal stimulus that was needed during the post-recession and financial crisis recovery period says one expert.

 

“When combined, the various measures are aimed at improving productivity and boosting private sector growth at a time when public spending is being constrained,” noted Craig Alexander, chief economist at TD Economics. “In addition to being fiscally prudent in the medium term, the government is taking action to pursue fiscally sound policies for the long run.”

 

Peter@peterdiekmeyer.com

 

 

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