Fiscal Stimulus or an historic role of the dice?

30 Jan 2009

OP/ED Piece for the London Free Press

From: Gerry Macartney, CEO and General Manager London Chamber of Commerce.

Now that we have all had a few days to digest this enormously complex "there's-something-in-it-for-everybody" budget, one has to wonder exactly what we have done to ourselves. When interviewed about my thoughts on the budget, at first glance I used the term, "cautiously skeptimistic". Don't look it up, it doesn't exist, but it does suggest in my view what many Canadians and pundits are thinking. They are doubtful yet hopeful, skeptical yet optimistic. More than anything, they are afraid. And it's really hard to know what the solutions are because absolutely no one has the answers and if they tell you they do, well - you remember Pinocchio!

If you are like me, one side of my brain shudders at the notion of going back into deficit after more than a decade of building reserves and paying down debt. The other part of my cerebrum ascribes to the notion that doing nothing is also not an option. Either way you'll likely end up back at skeptimistic??

The practice of spending your way out of recessions is clearly not new. FDR's New Deal of the early 30s has been widely panned as a failure or at the very least contributed to delaying economic recovery after the Great Depression. UCLA economists Harold Cole and Lee Ohanian believe that FDR's policies delayed the Depression by 7 years.

Economists Lowell Gallaway and Richard K. Vedder argued that without Social Security, work relief, unemployment insurance, minimum wages and government-granted privileges for labor unions, business would have hired more workers and the unemployment rate during the New Deal years would have been 6.7% instead of 17.2%.

In Japan during the 1990s, the government tried 10 fiscal stimulus packages overall totaling more than 100 trillion yen, and each failed to cure the recession. What the spending programs did do, however, was to put Japan's government in poor fiscal shape. Government spending there caused public debt to exceed 100 percent of GDP (highest in the G7).

And we don't have to travel back too far in time to remember the "spend-your-way-out-of-it" days of the Bob Rae era where before he left office, Ontario had lost 750 manufacturers. (I know, I know - it wasn't entirely his fault).

Beyond the fiscal stimulus concerns there are some additional issues that were not addressed in this budget that would have made me (and perhaps you) more optimistic than skeptical. For instance:

• Where was the announcement indicating that the government itself was going to share the pain by reducing the size of government?
• Where was the announcement indicating how many useless and non-productive programs, grants and subsidies were being eliminated?
• Where was the announcement indicating that the entire EI System was going to be reformed to accommodate what is predicted to be spiraling unemployment?
• Where was the announcement that indicates where we will be getting the money to service the debt on the $84 billion deficit (about $20 billion by my reckoning)?
• And after all the talk about the �Green� economy where was the announcement about new energy conservation and generation initiatives that would attract new capital and create jobs?

I am also concerned for our municipalities. The assumption that London and all Canadian municipalities have ready cash available on a matching basis for large �shovel-ready� infrastructure projects is flawed. They don't � but they will likely find the money or risk the window closing on the opportunity. Need I remind you who will be paying for that?

Finally, I am most concerned about how this budget does or doesn't align with the underlying principles that this Chamber and others across the country recommended to the feds before the budget ink was dry. In our brief to the Finance Minister we urged the following:

• That Budget 2009 must restore confidence in our economy and in our nation's leaders.
• That Budget 2009 must be based on realistic assumptions/forecasts.
• That Fiscal stimulus must be targeted, timely and temporary.
• That any Stimulus package should align with long-term policy objectives.
• That the Government should avoid long-term, structural deficits.
• That Budget 2009 should ensure that consumers, and small and large-businesses have access to credit.

To the extent that Budget 2009 has or will accomplish any or all of these recommendations is a matter for the historians to judge but until they render their verdict, I remain cautiously skeptimistic. With that out of the way, we all await the next steps of the Province and the City of London.

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