May3,2008
Ralph Goodale, the former Liberal finance minister had published an op ed( How Stephen Harper ruined Our National Balance Sheet, May 1, National post) criticizing the Harper government for risking plunging Canada into a deficit and for enacting a reduction in the consumption tax which he argued cost the Government 13 billion dollars in lost revenue. In response I sent the following letter into the National Post. They published a shortened edited version of the letter May 3 under the title Ralph Goodale's faulty economics, p.A21 but I still prefer the original longer one reproduced below.
Dear editor:
Ralph Goodale argues that with the impending recession in Canada that Stephen Harper has taken the country to the brink of a deficit as if this were some major transgression of public morality. In fact, as I have argued for years deficits can play a most useful role in an economic downturn in helping to limit the extent of the downturn by providing an alternative source of consumer and government demand for products and services to the demand that is being lost because of the rise in unemployment and undue pessimism among private investors.
So long as deficits are financed from Canadian savers who are also taxpayers and pay taxes on the interest payments received, as they will be and have been in the past and the Bank of Canada keeps the real rate of interest lower than the growth rate in the GDP then the net effect is to limit the downturn and restore prosperity faster than otherwise would be the case.
Deficits , in fact, limit the burden on future taxpayers because they limit the damage of recessions. Trying to run a surplus budget in an economic downturn as a number of bank economists, such as Douglas Porter, have pointed out in a front page article( National Post ,April 28, p.1)several days ago is likely to make matters worse , not better.
There is also a case to be made for lowering consumption taxes such as the GST as one approaches a downturn for it encourages consumption. Simply cutting income taxes may result in higher savings but less stimulus to consumption.
Finally, the savings rate in Canada may be higher than is reported if the national accounting system treats home ownership as being subject to a capital consumption allowance which is contrary to the accounting policies of other major countries .
Yours sincerely,
Harold Chorney
economist &
Professor of public policy
Concordia university
May 5, 2008
This morning in the National Post, the Conservative finance Minister, Jim Flaherty has also replied to Goodale and his letter( Goodale doesn,t understand taxes, May 5, 2008, p.A9) reveals that he remains as fiscally foolishly conservative as Goodale, arguing that come what may he will not run a deficit" taking care not to max out the country's credit card.`" Comparing the government of the world's ninth largest economy with a population of 33 million people with an experienced central bank and its extensive fiscal and monetary capacity to a personal credit card holder is absurdly misleading .
Canada has one of the lowest debt to GDP ratio of any of the G7 nations, is the 9th largest economy in the world(source IMF 2007: the US,the EU,China,, Japan, Germany, the UK, France, and Italy are all larger; Spain is the same size see the table below) and in the event of a downturn brought on by the slowdown/recession in the US and our close integration with the American economy a counter-cyclical deficit would be a necessary, intelligent and appropriate response to limit the damage. Doing otherwise would raise the rate of unemployment and impose longer lasting damage on the economy.
Both of these politicians need a refresher course in macro-economic policy .
GDP by country percentage of global GDP
(world 54.3 trillion)
US 13.9 trillion 25.4 %
EU 16.8 trillion 30.9
Japan 4.4 8.1
Germany 3.3 6.1
China 3.3 6.1
UK 2.8 5.2
France 2.6 4.8
Italy 2.1 3.9
Canada 1.43 2.6
Spain 1.44 2.6
Brazil 1.33 2.4
Russia 1.29 2.4
India 1.1 2.03
South Korea .957 1.76
Australia .908 1.67
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