Friday, July 24, 2009

Recession Is Over. Time To Get Ready To Balance The Books.

OTTAWA - The Bank of Canada is declaring the recession essentially over, saying Canada's economy will begin growing this summer after nine months of stagnation and lead most of the industrialized world next year.
Earlier, the bank had dropped its April call for a one per cent contraction this quarter and now says the economy will instead expand by 1.3 per cent annualized.
That will be followed by a three per cent advance in the last three months of this year, and three per cent growth next year.

But Carney also issued a caution that recovery "is not a foregone conclusion," and that the economy remains dependent on massive government stimulus and his own conditional pledge to keep the policy interest rate at the historic low of 0.25 per cent until mid-2010.
While more optimistic than most forecasts, Carney concedes the bounce-back is modest by historical standards. In fact, he does not have the economy returning to full capacity until mid-2011.

Currently, the bank estimates the Canadian economy is operating 3.5 per cent below capacity.
Ok. So we're not talking about 2010/11. But mid-2011, when the economy is expected to return to full capacity - that's the beginning of fiscal 2011/12. By then - it should be possible to make hard decisions. So 2011/12 should be the fiscal year when Canada returns to balanced budgets.

According to the recent budget documents, the government expects to raise $259.4B in the fiscal year 2011/12. Program spending, budgeted for that year amounts to $235.1B. With $37.2B in projected public debt charges on top of that, we have a $13B deficit. Unless we want to wait two or three more years for the revenues to finally catch up with the expenses, or unless we want to give the government an excuse to raise taxes, the deficit amount must come off the inflated program spending. Instead of $235.1B, program spending for 2011/12 should be capped at $222B. That's a 5.9% reduction.

Is such a reduction achievable? Yes. Since 2000/01, an average increase in program spending was almost double the rate of inflation and population growth combined. Had the program spending been capped at the rate of inflation, adjusted to population growth, the "base" program expenses budgeted for 2011/12 would have been $167B. The actual amount budgeted, however is $235.1B. Thus, in order to get rid of the $13B deficit, the government doesn't even need to eliminate overspending completely. All they need is to roll back some of the past excess spending increases, bringing the amount overspent down from $68B to $55B. Just trim the fact - and you get the books balanced in 2011/12.

After all - isn't that what the government planned to in the first place?
Hard decisions will be needed to keep federal spending under control and focused on results. Grants, contributions and capital expenditures will be placed under the microscope of responsible spending. Departments will have the funding they need to deliver essential programs and services, and no more. Our Government will engage Parliament and encourage members to take a more active role in scrutinizing spending and suggesting areas for restraint.
That's from the Throne Speech. So how about acting on these words for a change? How about introducing zero-base budgeting at least as a pilot project for the non-essential programs? The time is plenty, the government has more than half of 2009/10 and all of 2010/11 to prepare its plan to bring back fiscal restraint. And, if the government succeeds in bringing program spending under control, that will allow them to:
  • Balance the books in 2011/12
  • Phase in mandatory debt repayments (1% of the GDP each year) in 2012/13
  • Start offering new tax cuts in 2013/14
Now, isn't that a better way to manage nation's finances than just throwing money around and waiting for the revenues to catch up sometime in 2013/14, if not later?

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