Federal Budget Benchmarks

Impact on Jobs and the Economy

Over 100,000 full-time jobs were lost in the last two months of 2008, confirming that Canada has followed the U.S. into a serious recession. Going into the Budget, the emerging consensus among economic forecasters (e.g., BMO and TD Bank) was that the Canadian economy would shrink by at least 1% in 2009, after almost no growth in 2008. Some forecasts are even more gloomy, with the Bank of Canada now expecting the economy to shrink by 1.2% in 2009.

Slumping growth will raise the national unemployment rate to about 8% or even higher later this year, from a recent low of 6%. The unemployment rate could rise above double digit levels in all provinces east of Manitoba over the coming months.

While most forecasters expect – or hope – that a very modest economic recovery will begin later this year and in 2010, it takes real economic growth of more than 2% per year to stop the unemployment rate from rising. This is because the labour force is growing, and because employers will be pushing hard to lower costs in a period of downturn or slow growth by cutting jobs.

If too little is done here at home, in the U.S., and around the world – this recession will continue to deepen, and the unemployment rate will rapidly rise to double digit levels.

The incoming Obama Administration plans a major stimulus package which will hopefully make a big difference…. but it will be pushing against the very strong negative forces of falling exports, still rapidly falling housing prices, a continuing credit crisis, and a very rapid recent rise in the U.S. household savings rate. The rise in U.S. savings is driving the recent collapse of retail sales and housing purchases which is having devastating impacts on our already hard-hit manufacturing sector.

In both the U.S. and Canada, interest rates are now at historically low levels. But this will not in and of itself stimulate significant new borrowing or even guarantee that credit will be available to employers and households. It is up to governments to inject purchasing power into the economy to sustain production and jobs.

What Canadian governments can do in terms of fiscal policy may be modest in the overall global scheme of things, but it is potentially very important in terms of providing some cushion to an economy which will be hard hit by the deep U.S. recession and by the sudden, very sharp drop in prices, and slumping global demand for Canadian energy and other resources.

The labour movement internationally has supported the G 20 / International Monetary Fund call for co-ordinated Budget stimulus packages of about 2% of national income, or about $31 billion in the case of Canada – the benchmark adopted in the CCPA’s recent economic stimulus plan. Major packages on or near this scale have been or will soon be implemented in the U.S., the U.K., Germany, France, China, and other major economies. The IMF is about to revise down its own gloomy forecasts, and call for even more stimulus.

Stimulus can and should be provided by all levels of government. However, the federal government has to take the lead. Local governments have little or no independent fiscal capacity to act, and a significant portion of provincial spending – especially in the poorer provinces – comes from federal transfers. Some provinces have hamstrung themselves through balanced budget legislation.

It is important to note that “fiscal stimulus” is not the same thing as running a deficit. The federal government is going into deficit mainly because tax revenues (especially corporate tax revenues) will slump along with the economy, but this does not inject new purchasing power into the economy.

The underlying federal deficit for 2009-10 is now in the range of $10 billion even before new actions are taken.

Stimulus should be concentrated in two key areas, public investment in infrastructure, “green industries” and public services; and income support for the victims of the recession, especially through improved access to Employment Insurance and higher Employment Insurance benefits, and higher public pensions.

Public investment has a much bigger impact on job creation and the economy than does broad brush corporate tax cuts, and income supports targeted to those most in need are much more effective than across-the-board personal income tax cuts.

Corporate tax cuts are a poor way to create jobs and help troubled industries because they are of no use to companies losing money, and have little or no impact on real investment (which was very slow in recent years outside the energy sector despite deep cuts to corporate tax cuts). Businesses will invest only when they see the economy recovering, or if new investment is directly supported by governments.

Broad brush personal income tax cuts are also a poor job creator because some of the tax cuts will be saved – especially when there is widespread fear of job loss – and because a high proportion of consumer spending goes to imports. $1 billion of personal tax cuts increases GDP by just $720 million and creates just 7,000 jobs – while $1 billion spent on public infrastructure increases GDP by $1.8 billion and creates 16,000 jobs (Informetrica Ltd. estimates cited in the CCPA’s recent stimulus package).

The Alternative Federal Budget economic stimulus package met the 2% of GDP test, concentrated on public infrastructure investment and EI benefit improvements. Informetrica calculated that this would boost GDP growth by 3% and create over 400,000 new jobs.

The federal government can readily afford to invest in a major stimulus package. Unlike in previous recessions, the cost of government borrowing is now very low, less than 3% today for ten-year Government of Canada Bonds. Federal government debt has shrunk very rapidly as a share of the economy, from a high of 70% a decade ago, to just 30% in 2007-08.

A focus on tax cuts is also the wrong way to go because, if they are made permanent, they shrink fiscal capacity and set the stage for structural deficits and spending cuts down the road. We are already paying the price for the two-point cut to the GST in terms of reduced room to shift fiscal resources to where they will have the most impact on growth and jobs. By contrast, well chosen public investments boost growth and jobs today, and set the stage for higher productivity and a stronger economy and society tomorrow.

The key questions going into the Budget are: How much stimulus? What kind of stimulus? What are the overall impacts on jobs and growth? Does the fiscal plan add up, or does it set the stage for spending cuts in the future?

Investment in Public Infrastructure

The federal government should, in partnership with the provinces, territories, and cities, launch a major multi-year public investment program which would create jobs now, promote our environmental goals, and build new industries for the future. It should cover roads, sewers, and basic municipal infrastructure; First Nations community improvements; health and educational facilities; mass transit; passenger rail; affordable housing; energy conservation through building retrofits; and renewable energy; and should be twinned to a Made in Canada procurement policy that would help support new jobs in manufacturing and services.

We need a multi-year investment program because, even in a best-case scenario, high unemployment will remain with us for some years to come, and because we had a huge public infrastructure and environmental deficit going into the crisis which will not be resolved through just a year or so of accelerated so-called “shovel ready” projects.

Government contracts should promote a strong public sector by avoiding P3s, and should promote unionization,and inclusion of women and workers of colour in good jobs.

Key questions going into the Budget: Size and duration of the package? Does it remove or limit the current costly and time-wasting mandatory requirement to actively consider P3s to access the Building Canada Fund? Will funds flow quickly and effectively to the cities? To what extent does the package meet our environmental and climate change goals?

The Manufacturing Crisis

The federal government should, instead of across-the-board cuts to corporate tax rates, invest directly in support of sector renewal strategies to save jobs and promote successful restructuring in hard hit industries, such as auto, forest and fish products; should support investments to support cultural industries, environmental technology, renewable energy, and other promising industries of the future; and should promote fundamental changes to unbalanced trade deals to reverse our manufacturing trade deficit and promote higher value-added processing of our resources.

Employment Insurance Benefits

Major improvements to EI should be a centrepiece of the Budget, since this directly assists the victims of the recession and is an effective form of economic stimulus because the unemployed will spend rather than save, and support community economies. There should be a uniform entrance requirement of 360 hours in all regions; benefits based on 60% of earnings over the best 12 weeks; and benefits lasting up to 50 weeks. Tax measures directly targeted to low income families – such as increased GST and child credits – would also be helpful.

Pensions

The Budget should improve public pensions through a phased-in doubling of the CPP/QPP, and immediate increases to Old Age Security and the Guaranteed Income Supplement to protect today’s and tomorrow’s retirees and to reduce reliance on private pensions and RRSPs; create a pension guarantee fund to backstop promised pension benefits; and provide flexibility for employers sponsoring pension plans only if unions agree, and this does not come at the cost of insecure pensions.

Support for Training and Labour Adjustment

There should be major increases in spending on labour adjustment programs and training so that workers can access the new jobs being created through public investment programs, sector strategies, and public services investments. Funds should flow to support high quality training of both unemployed and employed workers.

Federal-Provincial Transfers and the Future of Public Services

The federal government should maintain all existing transfers to the provinces and cities which help pay for health, post-secondary education, training, infrastructure programs, and, through equalization, all public services and social programs. These programs ensure that people are not left on their own in tough economic times. We also need new investments in child care, home care, and long-term care for the elderly to create new jobs while promoting our social goals.

Equality and Inclusion

The Budget must pass the test of ensuring that resources are directed so as to include women, workers of colour, and other equality-seeking groups. Investments in public services are major job creators for women, and equality-seeking groups can be included in more traditional infrastructure investments through training and other measures. Improved access to EI would especially benefit women and recent immigrants.

Global Issues

The Budget should maintain and increase Canadian support for international development and express support for co-ordinated international action to deal with the crisis, including support for effective national and international regulation of the financial sector.