- Kevin Page points out a few of the issues which should be on the table when Canada's finance ministers meet next week:
Our finance ministers are smart. They know that faster growth is going to require higher investment rates and sustainable public finances. But the reality is that Canada is falling down on capital investments in both the private and public sectors. Business capital investment has grown a weak 2 per cent over the past two years. That is not boosting the investment rate. Meanwhile, government capital investment has declined 2 per cent over the same period, and that is after the 2009-10 fiscal stimulus. This is not a recipe for boosting growth.- And Andrew Jackson notes that even our mediocre economy of the past few years has relied on unsustainable household-level debt to make up for government neglect:
Why do we continue to pursue an approach that stunts growth now and for the future? Is this public sector mismanagement? Or, is this an effort to achieve a balanced budget that allows for spending on current goods or services (for my generation that votes) at the cost of capital goods for future generations (our children and grandchildren that do not yet vote)?
The austerity approach set out in the 2012 federal budget will succeed in generating a balanced budget, but at a cost: slower growth and degraded public services like support for veterans. Meanwhile, the government is responding to its improved fiscal situation not by raising the investment rate, but by cutting taxes further.
Analysis by the Parliamentary Budget Office (and Finance Canada) indicates that the federal fiscal structure is sustainable. This is largely because Ottawa has reduced the growth escalator on health transfers, downloading the problem to the provinces. Provincial governments, already struggling under increased pressure caused by slow growth, have a long-term fiscal gap they will have to address.
Given all of these challenges, the finance ministers’ meeting ought to be a pivotal moment. The temptation to focus primarily on oil prices must be avoided. If we want economic growth to raise incomes, address inequalities and ensure essential public services, we are going to have to raise the investment rate in Canada. There’s no other way.
Younger households on modest incomes are often highly stretched financially, have little or no equity in their homes, are often carrying high levels of credit card debt, and are saving very little for retirement. When housing prices fall and/or interest rates rise, they will be highly vulnerable- But Thomas Walkom discusses Stephen Harper's stubborn consistency in remaining out of touch with Canadians - a pattern which includes handing out tax baubles rather than developing an economic policy that actually benefits workers. And Louise Elliott offers another important example of the principle, as the Cons are approving Microsoft's plan to drive down wages and avoiding hiring Canadians by rubber-stamping a request for hundreds of temporary foreign workers.
By contrast, to households, non financial corporations are in rude financial health, and have been net lenders to the rest of the economy in recent years. Credit market debt of non financial corporations is 58% of business equity, a ratio which has been stable for a decade, and these corporations are currently sitting on $656 billion of cash or what former Bank of Canada governor Mark Carney referred to as “dead money.”
While the Bank of Canada has consistently said it hopes to see a “rotation” of demand from households to corporate investment, household debt continues to rise, driven by low interest rates and generally stagnant incomes. CIBC Economics has noted a recent acceleration of consumer borrowing.
As the old saying goes, when something cannot go on forever, it won't. Households cannot continue to borrow so as to spend more than they earn, and house prices cannot rise indefinitely compared to incomes.
We risk a major shock to the economy when the day of reckoning arrives, not least because business investment is unlikely to grow rapidly at a time when household demand is weak.
Some part of the economy, be it households, corporations or governments, has to be borrowing at any given time so as to put savings to use and to maintain overall demand. If households are stretched and business are reluctant investors, it will be up to government to save us from a downturn through increased public investment.
- Branko Milanovic observes that Russia offers a particularly stark example as to how free-market dogmatism led to both a destructive giveaway of public assets, and a corrupted form of corporatism afterward. But unfortunately, Robert Benzie reports that the Ontario Libs are just one of many current governments following the same path.
- Finally, Larry Savage and Stephanie Ross comment on the need for a united labour front in working to replace the Harper Cons and other reactionary governments with progressive alternatives.