Canadian 08 budget predicts unemployment rise

Feb. 27, 2008


The Conservative party Finance Minister tabled his budget in Parliament yesterday. The budget reports a   total of $14.2 billion paid to debt reduction for 2006/07 and an additional 10.2 billion for fiscal 2007/08 for the year ending in March.
This means that in the past two years the Government will have raked in in taxes a total of almost 25 billion dollars that it has and will use for debt reduction. This has happened while there are still serious shortfalls in infrastructure expenditures, health and education expenditures, defense expenditures and investments and inadequate aid for   social housing. The debt to GDP ratio has fallen to one of the lowest levels in the past 80 years, 29.9 % and is poised to fall further in the next two years.

It is a pathetic example of excessive dogmatism on the fiscal conservative front which has brought great damage to the country.

On top of this the Government reports on the consensus among private economists that the national unemployment rate will rise to 6.4 % by 2009. Given the dogmas that reign over the Bank of Canada it is quite possible that the rate will go higher. The currency markets have jacked up the value of the Canadian dollar to over 1.01 US and if the Fed cuts rates again which seems highly likely the pressure for a further upward rise in the exchange rate seems very likely particularly when we see the rising trend in oil and grain futures.

The government is also setting up a tax shelter for savings. This is a dubious proposition at a time when private investment opportunities are scarce because of the lack of confidence in the economy.Since savings decisions are always   subtractions from spending and investments net spending will be lower.It will simply make it harder for total aggregate demand to be sufficient to keep unemployment rates low . The end result will be lower incomes and hence lower savings. Incomes always precede savings, savings are a residual from income levels. if you want higher savings encourage higher incomes. It is spending and investment that results in incomes. The increased   saving of money incomes during hard times by prudent people only aggravates the problem of adequate spending and investment. Similarly prudent Finance Ministers who insist on accumulating large surplus budgets during an economic downturn are destined to make economic matters worse.

More on the budget later