Not very stimulating

An amended text from my speaking notes for the press conference releasing the 2009 Alternative Federal Budget. The press conference was covered live on Newsworld and Newsnet. In it we took an opportunity to comment on yesterday’s leak that the deficit will be $34 billion in 2009/10 and $30 billion in 2010/11. The good news is that after a year of denials, the government, Bank of Canada and private sector banks and forecasters are catching up to us; the bad news is that they still have a ways to go.

As January unfolds there is no longer any doubt that Canada is in a recession. All major economic indicators are moving in the wrong direction. 100,000 jobs were lost in just the last two months of 2008. Retail sales have plunged. All of the forces that propped up the economy in recent years, asset prices in housing and stocks, commodity prices and US demand have pulled back significantly.

Leading in to Tuesday’s budget, the government appears to have shifted toward accepting the need for a cyclical deficit and a stimulus package above and beyond that. But it is still maintaining that Canada faces a temporary downturn and will resume its growth path in 2010, a view reiterated in yesterday’s Bank of Canada report. We should expect our leaders to be biased towards overly optimistic sentiments but there is good reason to believe that the powerful economic forces at play will underwrite a longer period of stagnation similar to what Japan experienced in the 1990s.

Thus, the federal government must join with other countries that have tabled extensive stimulus packages in recent months. In Tuesday’s budget the danger is in doing too little. What matters now is the magnitude of the response and what the stimulative value is of the measures are taken in the budget.

Tuesday’s budget must move quickly to create jobs, invest in strategic long-term initiatives and help those who need it most. A few weeks ago, the CCPA’s Alternative Federal Budget set out an aggressive stimulus package for the Canadian economy that lives up to these objectives.

But the numbers leaked yesterday point to the fact that the government has already failed the test of delivering an adequate stimulus. There is an important different in the status quo or cyclical deficit that emerges from the drop in revenues, and a stimulus package that creates additional income to fight a recession. A $34 billion deficit in 2009/10 sounds large, and is reminiscent of the last time Canada had deficits in the early 1990s. But we have to remember that Canada’s economy is much larger than it was in the early 1990s. Removing the cyclical deficit, the remaining stimulus package of 1% of GDP is only half as much as the 2% of GDP that is being called for by the IMF, the OECD and others, and what the United States, European countries and others have already tabled.

This will mean higher unemployment and greater hardship in Canada than need be the case.

The content of the stimulus package also matters a great deal. Today we released the full AFB. In it, we lay out five tests for Tuesday’s budget, to help Canadians and our politicians make a choice. The AFB also sets out a long-term course to deliver on a strong, prosperous, and greener Canada.

1. Budget 2009 should shore up the Employment Insurance (EI) system. EI is the federal government’s most important automatic stabilizer, and most agree it has been greatly weakened and must be reinforced to face rising unemployment.

2. Budget 2009 should support the hardest hit Canadians, in particular low-income families and hard hit communities, by making a commitment to fight the shame of homelessness and abject poverty in Canada.

3. Budget 2009 should implement an ambitious social, physical and green infrastructure program – a measure that could create hundreds of thousands of new jobs just when we need them.

4.Budget 2009 should support key value-added sectors with restructuring criteria to ensure they become green and sustainable.

5. Finally, Budget 2009 should emphasize public investment and spending over tax cuts because of their much higher multiplier effects on incomes and employment. We will get better bang for the buck if we deliver money into the hands of those who will spend it right away, particularly those with lower incomes. Research shows that tax cuts end up in savings or get used to pay down household debt. Those dollars don’t end up in the economy where they are desperately needed.

The majority of Canadians, especially the middle class, benefit more from public services such as good education, health care, and affordable child care than they have from years of federal tax cuts. That’s where the investments need to be in Budget 2009.

The government needs to move on real measures that are best able to get Canadians through these tough times, and position us for the next generation. In the face of the worst global economic crisis since the Great Depression we need our federal government to get it right on Tuesday.