Tag Archives: deficit

Column: There has to be more than tax cuts

My latest column in The StarPhoenix.  I’ll add in some extra link later today but for now I need to get some work done for my other employer.

The Star Phoenix Since the end of the Super Bowl, I have been following the National Football League lockout and the litigation surrounding it. I have concluded that the hard-line owners and the players association leaders are the stupidest group of people not working in the National Hockey League’s front office.

That all changed last week, when both the Republicans and the Democrats started to talk openly about defaulting on the debt of the United States – something that seemed so preposterous that I thought I was reading a headline from News of the World.

Sadly it wasn’t. If a deal isn’t struck soon, the U.S. will default on debt – something that neither Canada nor most western nations have ever done – and it will cause economic chaos around the world, again. Why has it come to this? You can blame George W. Bush or Barack Obama, but this one rests with the Tea Party.

Almost everyone agrees that the U.S. budget has to be cut.

Incredibly, President Bush cut taxes at the start of his first term and then, while the world changed after the Sept. 11 attacks, the U.S. tax rate did not.

Rather than raise taxes to pay for wars in Afghanistan and Iraq, Bush kept the rates low and borrowed, as if there were no tomorrow.

In case you haven’t taken time to think about how expensive wars can be, the U.S. spent $20.2 billion to provide air conditioning alone in Afghanistan and Iraq last year. By contrast, Canada’s massive Economic Action Plan had just $12 billion in new infrastructure spending.

On top of the wars, the Great Recession hit. Then, to control long-term health costs, Obama brought in health-care reform. It wasn’t universal care, but better than what Americans had. Suddenly people started talking about seceding from the union. Apparently helping people with their health problems is unconstitutional.

Somehow, out of all of this, the Tea Party was formed and has decided to fight raising the debt ceiling.

Conservative columnist David Brooks calls the Tea Party a "psychological protest," and I tend to agree. You would dismiss the partiers as wing nuts if they didn’t hold the balance of power.

In the 2010 midterm elections, the Tea Party was quite willing and able to defeat any Republican incumbent who compromised on increases to spending or taxes. The result is that Republican Congressmen know they will face a tough primary challenge from the right if they step out of line and compromise.

The result? A possible debt default.

What I find interesting about this is not the politics but the psychology. Tea Party supporters see taxes and government as evil: No tax increase can ever be justified.

I complain about taxes like everyone else. I howl every year when the mill rate goes up, but after 13 years of making weekly mortgage and property tax payments, my payments are now $130, up from $114 a week in 1998. Even if the city reduced its tax rate to the 1998 level, my gain would be about $15 a week. I cheered when the GST was lowered to five per cent from seven per cent, but I haven’t noticed the price go down on anything I have bought.

While I don’t especially like paying taxes, I also know they go toward making our city and our country a better place to live. Even the great icon of conservatism, Ronald Reagan, raised taxes when more revenue was needed. Brian Mulroney’s hated GST was a component that allowed the Chretien Liberals to balance the budget.

Yet to balance the budget the Tea Party demands only spending cuts, which will largely hurt the poor, rather than seeking to close tax loopholes for the rich. They propose gutting Medicare, which could hurt seniors across the nation.

It’s something you hear often and it boils down to: "If I can make it, so can everyone else." It’s based in a deep ignorance of the social, medical and geographic realities of how we are raised, the opportunities we are given or the geography we settle in. In Saskatchewan, where prosperity often has come because of the soil conditions of the homestead, we understand this.

Spending cuts are often deemed to be courageous and noble and at times they are. But so is ensuring the less fortunate are taken care of. We’ve always known that as a city and a province. I hope we won’t forget that, as others have.

The deficit we imagine vs. the deficit we have

The New York Times is reporting on the deficit and debt ceiling fight that is happening right now.

Eventually, the country will have to confront the deficit we have, rather than the deficit we imagine. The one we imagine is a deficit caused by waste, fraud, abuse, foreign aid, oil industry subsidies and vague out-of-control spending. The one we have is caused by the world’s highest health costs (by far), the world’s largest military (by far), a Social Security program built when most people died by 70 — and to pay for it all, the lowest tax rates in decades.

To put it in budgetary terms, the deficit we imagine comes largely from discretionary spending. The one we have comes partly from discretionary spending but mostly from everything else: tax rates, Medicare, Medicaid and Social Security.

It made me think of an article that Dave Hutton wrote this week while covering City Council’s executive committee meeting.  It starts with city manager Murray Totland appearing to give political direction to city council.

In a report to the city’s executive committee Monday, city manager Murray Totland said there is "growing sentiment" among residents that the city needs to refocus the programs and services it offers and "get back to the basics."

"We can sit back and reflect a bit about what programs and services matter most to us," Totland said. "It’s just to focus and maybe rethink our priorities. What matters most?"

It goes on with this.

Coun. Maurice Neault called for "zero-based budgeting" aimed at holding the line on taxes. "Once we get going, we’ll be amazed and surprised by the result," Neault said.

"Each of the things that we might want to give up has a role in the city," Coun. Charlie Clark said.

Saying it will be a "gut-wrenching" process, Coun. Myles Heidt said "something’s gotta go" to get to a two or three per cent hike. Council increased property taxes 3.99 per cent last year, but weren’t able to make fundamental changes some councillors called for during two nights of budget deliberations.

Taxes have risen an average of 3.7 per cent each year since 2005.

"Let’s not sugar-coat this," Heidt said. "It could be programs, it could be staff, it could be anything. We’ve got to make some decisions now."

Where to start.  First of all most of the spending that has generated controversy has been capital spending, sans curbside recycling which comes in at a little over $4 million per year.  It’s not an insignificant amount but this is a city of over $200,000 and things cost sometimes.  So as a response to increased capital spending, some on city council have decided that the best way to go is to cut operational spending… on the political advice of the city manager. 

Here is something that gets lost in these debates.  Sometimes its takes courage to spend money and you know what, sometimes it takes guts to say that things are important to us as a city, even if it increases the tax rate.  Somewhere around the time that George H. Bush said “no new taxes” and today spending on government programs has the ultimate evil and instead of being a just society, we have become a society that has adopted a narrative that says, I have it so I deserve it.   We saw it during the 2000 presidential campaign where Al Gore and George W. Bush fell over themselves to tell Americans that the surplus belonged to them and they knew best what to spend it on.  The American public spent the money on cheap consumer goods imported from China while at the same time the United States had to borrow heavily to find two wars and is faced with a massive infrastructure deficit on their own.

I was reminded of this Paul Krugman column from earlier this year.  It was written in the aftermath of the Gabrielle Gifford assassination attempt so the language is a little raw but he has some relevance to the debate over how the city spends it’s money.

One side of American politics considers the modern welfare state — a private-enterprise economy, but one in which society’s winners are taxed to pay for a social safety net — morally superior to the capitalism red in tooth and claw we had before the New Deal. It’s only right, this side believes, for the affluent to help the less fortunate.

The other side believes that people have a right to keep what they earn, and that taxing them to support others, no matter how needy, amounts to theft.That’s what lies behind the modern right’s fondness for violent rhetoric: many activists on the right really do see taxes and regulation as tyrannical impositions on their liberty.

There’s no middle ground between these views. One side saw health reform, with its subsidized extension of coverage to the uninsured, as fulfilling a moral imperative: wealthy nations, it believed, have an obligation to provide all their citizens with essential care. The other side saw the same reform as a moral outrage, an assault on the right of Americans to spend their money as they choose.

This deep divide in American political morality — for that’s what it amounts to — is a relatively recent development. Commentators who pine for the days of civility and bipartisanship are, whether they realize it or not, pining for the days when the Republican Party accepted the legitimacy of the welfare state, and was even willing to contemplate expanding it. As many analysts have noted,the Obama health reform — whose passage was met with vandalism and death threats against members of Congress — was modeled on Republican plans from the 1990s.

Being Canadian, of course there is middle ground, we are all about the middle ground but there is a view that says that the smaller our civic responsibilities are, the better off we are as a city.  As former councillor Elaine Hnatyshyn writes,

In today’s SP (June 21/11) it is reported that council will take a ‘gut-wrenching’ review of services. Back to basics seems to be the coming theme for budget preparation for 2012, a civic election year. Would I rather have services necessary to my daily living over debt and debt repayment? Do I want my roads repaired? Street cleaning? Snow Removal? Or do I want pay to maintain River Landing, the Shaw Olympic Pool, Art Gallery of Saskatchewan . . . . .

In some ways Hnatyshyn’s comments make a lot of sense.  There is a pothole on Avenue E (between 34th and 33rd) that is so large that it will have it’s own MP in the next redrawing of electoral boundaries.  It has done some damage to quite a few vehicles when the shadows camouflage it’s true depth but I disagree when she talks about River Landing or a new pool and Art Gallery. 

Wendy and I are doing okay financially.  I work for the Salvation Army and they have treated me well.  Working for a non-profit organization is no way to get rich.  Wendy works for Safeway and is lucky to have been part of the old guard there where the salary is still livable.  We also own our home and pay around $600/month for mortgage and taxes (about $150 more a month in taxes than when we bought it).  Despite doing okay, some of the derided extra services the city provides, make a big difference in our standard of living.  Is Mayfair Pool an essential service the city should be providing?  No it’s not.  It’s a money pit but tell that to my sons who name it as one of the best things about their summer.  Like most people in Saskatoon, we don’t have a pool and so these public spaces serve as an important roll in giving those who don’t have the resources, access to important services.  Have you seen the mayhem at the waterpark at River Landing many days?  That’s not essential either but it provides a free public gathering spot for thousands of people everyday.  Starting tonight the city will be full of the sounds of the SaskTel Jazz Festival.  In addition to crown corporation sponsorship dollars going to subsidize the event, funding agencies include the City of Saskatoon and Canadian Heritage, money that goes to help subsidize the event, keeps ticket prices down and helps keep the free stages going.  You know, so more people can come down and enjoy it despite not being able to afford it.  This isn’t a new concept.  Years ago the citizens of Saskatoon decided to keep commercial and residential development away from the part of South Saskatchewan River valley and eventually decided to create the Meewasin Valley Authority, mostly because we realized that a riverbank that was open to all of us, was important.  That initiative was started by Saskatoon’s City Council in 1974 and has become one of Saskatoon’s crown jewels.

The Art Gallery of Saskatchewan Remai Art Gallery of Saskatchewan is not an essential service but what is the value of an art gallery to the citizens of Saskatoon.  As a kid growing up in Calgary, we very little money after my dad left but I remember being taken to the Glenbow Museum (which uses over $3 million in govt funding each year).  I still have vivid memories of models, displays, and information as we would wander through the galleries of history, politics, and art.  I had no idea at the time but that place started me off on a lifetime of learning and curiosity.   My son has a passion for design and architecture which started from seeing an exhibit of Clifford Weins at the Mendel Art Gallery a couple of years ago.

So what does a Saskatoon look like without the Meewasin Valley Trail, Harry Bailey Aquatic Centre, Mayfair Pool, or the architecture of University and Broadway bridges?  Does 20th Street look as hopeful today without the city redesigning and rebuilding sidewalks?  How much higher are rent rates without a city that invests heavily into affordable housing.  As Richard Florida writes in the Rise of the Creative Class, some of the cities in the United States that are struggling the most have the lowest tax rates.  No one wants to live there, no one wants to work there.  One of thing that many cities who are growing and vibrant have in common is that they do have higher taxes but it’s citizens believe that they are getting good value from living there and enjoy the extra services and amenities.   What’s crazy about this budget and spending debate is that Saskatoon has low taxes and is providing some extra value.  By deciding that we have to make “gut-wrenching” cuts and limit operational spending to 2% (or inflation), some councillors are saying that the city’s role in shaping the city is done.  I don’t agree.  There is a role for government to shape our city and provide a city that all of it’s citizens can enjoy.  Sometimes it takes money to spend money to make a city better and more liveable.  Yesterday I linked to a video about Helsinki, Finland and as a video said, they had the courage to take risks and make changes.  Hopefully city council will be able to find it.

The Shape of Things To Come

60 Minutes had a feature on the budget crisis’ that are happening at the state level.  Stay with me on this one.

"The most alarming thing about the state issue is the level of complacency," Meredith Whitney, one of the most respected financial analysts on Wall Street and one of the most influential women in American business, told correspondent Steve Kroft

Whitney made her reputation by warning that the big banks were in big trouble long before the 2008 collapse. Now, she’s warning about a financial meltdown in state and local governments.

"It has tentacles as wide as anything I’ve seen. I think next to housing this is the single most important issue in the United States, and certainly the largest threat to the U.S. economy," she told Kroft.

Asked why people aren’t paying attention, Whitney said, "’Cause they don’t pay attention until they have to."

Whitney says it’s time to start.

California, which faces a $19 billion budget deficit next year, has a credit rating approaching junk status. It now spends more money on public employee pensions than it does on the state university system, which had to increase its tuition by 32 percent.

Arizona is so desperate it sold off the state capitol, Supreme Court building and legislative chambers to a group of investors and now leases the buildings from their new owner. The state also eliminated Medicaid funding for most organ transplants.

Then there’s New Jersey. It has the highest taxes in the country, a $10 billion deficit and a depressed economy when first-year Governor Chris Christie took office. But after looking at the books, he decided to walk away from a long-planned and much-needed project with New York and the federal government to build a rail tunnel into Manhattan. It would have helped the economy and given employment to 6,000 construction workers.

Gov. Christie acknowledged that’s a lot of jobs. "I cancelled it. I mean, listen, the bottom line is I don’t have the money. And you know what? I can’t pay people for those jobs if I don’t have the money to pay them. Where am I getting the money? I don’t have it. I literally don’t have it."
Asked if this is going on all over the country, Christie told Kroft, "Yes. Of course it is. It’s not like you can avoid it forever, ’cause it’s here now. And we all know it’s here. And the federal government doesn’t have the money to paper over it anymore, either, for the states. The day of reckoning has arrived. That’s it. And it’s gonna arrive everywhere. Timing will vary a little bit, depending upon which state you’re in, but it’s comin’."

And nowhere has the reckoning been as bad as it is in Illinois, a state that spends twice much as it collects in taxes and is unable to pay its bills.

"This is the state of affairs in Illinois. Is not pretty," Illinois state Comptroller Dan Hynes told Kroft.

Hynes is the state’s paymaster. He currently has about $5 billion in outstanding bills in his office and not enough money in the state’s coffers to pay them. He says they’re six months behind.

"How many people do you have clamoring for money?" Kroft asked.

"It’s fair to say that there are tens of thousands if not hundreds of thousands of people waiting to be paid by the state," Hynes said.
Asked how these people are getting by considering they’re not getting paid by the state, Hynes said, "Well, that’s the tragedy. People borrow money. They borrow in order to get by until the state pays them."

"They’re subsidizing the state. They’re giving the state a float," Kroft remarked.

"Exactly," Hynes agreed.

"And who do you owe that money to?" Kroft asked.

"Pretty much anybody who has any interaction with state government, we owe money to," Hynes said.

That would include everyone from the University of Illinois, which is owed $400 million, to small businessmen like Mayur Shah, who owns a pharmacy in Chicago and has been waiting months for $200,000 in Medicaid payments. Then there are the 2,000 not-for-profit organizations that are owed a billion dollars by the state.

Lutheran Social Services of Illinois has been around since 1867 and provides critical services to 70,000 people, mostly the elderly, the disabled, and the mentally ill. The state owed them $9 million just before Thanksgiving, and they nearly had to close up shop.

Asked how long his organization can go on like this, Rev. Denver Bitner, the president of Lutheran Social Services of Illinois, told Kroft, "Well, we wonder that too because we really don’t know."

He says they were forced to tap their entire line of credit and all their cash reserves before the state would finally pay them as a hardship case.
"It has to be that you’ve sold off all your assets, you have borrowed from everybody that you can borrow from, and then, we’ll think about it," Rev. Bitner explained.

And according to Bitner, that’s even though the state owes his organization the money.

"The first words out of my mouth are usually an apology, because they have been you know put in this situation, that is really unacceptable. And you know there is very little I can do or say other than apologize," Comptroller Dan Hynes said.

It’s not just the social safety net that Hynes has to worry about: there have been Illinois legislators that have been evicted from their offices because the state didn’t pay their rent, and stories about state troopers being turned away from gas stations because the owners refused to take their state credit cards.

"The state’s a deadbeat," Kroft remarked.

"Yeah. I mean, the state of Illinois is known as a deadbeat state. This is a reputation that has taken us years to earn and we’ve reached, you know, the heights of, I think, becoming the worst in the country," Hynes said.

In the early 1990s, Saskatchewan was on the verge of bankruptcy because the Grant Devine governments of 1982-1991 would not curb government spending and the deficit for a province under a million people grew to over one billion dollars.  The incoming NDP government of Roy Romanow was more pragmatist than idealistic and spent almost a decade trying to get the province on solid financial footings.  That journey was documented in the book Minding the Public Purse by the Hon. Janice MacKinnon, who was the Finance Minister during the most of the cuts.  Like I said, it was a decade of austerity.  There was funding cuts to healthcare, almost no building on the University of Saskatchewan or University of Regina campuses, a higher number of students in classrooms, longer waiting lists, rural hospitals closing, decaying highways, and it was really a lost decade.  Yes Saskatchewan did grow a bit during this time but with our financial house in disarray, growth was hard.

MacKinnon talks about how close Saskatchewan was to defaulting on it’s loans.  With the precarious state of the Canadian economy (pre-Chretien and Martin), there was some legitimate concerns that this could lead to an IMF bailout and intervention.  Luckily it never came to that but it did mean higher tuitions, higher taxes, more fees, a lot of lost opportunities that we are just now seeing as a province.

What’s scary is that the deficit numbers coming out of the U.S. states are worse and for all intents and purposes, the US economy is soon going to be in as bad or as worse shape as the Canadian economy was in the early 1990s.  I keep looking at the debt crisis that is swamping the EU economies and I can’t help but wonder until how long it is that you see places like Michigan, Illinois, and California needing massive financial bailouts.  Good grief, California has even looked at dissolving as a state and becoming a territory again (I don’t think it was a serious option).

How many lost decade will the United States go through to pay for wars in Afghanistan, Iraq, and the greed of the banks?  It took over a decade to recover from Vietnam and the state and cities economies weren’t in such tough shape.  This could either take decades or it could be the start of the long decline of the United States as a economic power.

The good news is that from Saskatchewan and Alberta’s experience is that as voters, we understood that it had to be done.  Whether it was the right wing Ralph Klein in Alberta or the centre-left Roy Romanow in Saskatchewan, we knew it had to be done and as a whole, we stood by them as they did the heavy lifting and hard cutting.  The  bad news for many states is that Saskatchewan has a natural inclination to support the NDP and Alberta has a natural inclination to vote Progressive Conservative which means that during the tough times, the provinces returned (or in Alberta’s case, they only ever elect Conservatives) what they knew and trusted during rough times.  If you don’t have you could have a series of one term administrations that moved from spend to cut to spend to cut for short term partisan advantage which could derail or destroy the entire process.  Too make spending cuts that are needed, you need a really strong majority which is not a strength of the American system which features a lot more checks and balances.

I can’t see many states turning themselves around.

2012

Greg Ip in the Washington Post

Let me take a stab at what the next crisis will be. Our deficit, as a share of GDP, is at a peacetime record, and the debt is climbing toward a post-World War II record. Thoughtful economists agree on the response: Combine stimulus for our fragile economy now with a plan to slash the deficit and stabilize the debt when the recovery is more entrenched.

Yet the approaching November midterms have made it impossible to advance a serious proposal for doing that. Congress has been unable to pass a budget, and the government is operating on a short-term "continuing resolution." President Obama’s plan for reining in the national debt consists of appointing a bipartisan commission that won’t report until after the midterms. Even if the commission can agree on a realistic plan to chop the deficit, the polarized state of Congress suggests slim odds of adoption.

With neither party able to muster the support to get serious about reducing the deficit, both may prefer to kick the problem down the road to after 2012, in hopes that the election hands one of them a clear mandate.

For now, there’s enough risk of Japanese-style stagnation and deflation that U.S. interest rates could remain very low for a while yet. But if that risk fades, investors in U.S. Treasury bonds will want to know how we’ll get our deficits and debt under control — and could demand higher interest rates to compensate for the uncertainty. By then, though, the 2012 campaign may be upon us. The Republican nominee will assail Obama’s fiscal record and promise a determined assault on the debt. Obama will respond by blaming George W. Bush and promising to unveil his own plan once he’s reelected. Neither will commit political suicide by specifying which taxes they’ll raise or which entitlements they’ll cut.

Will investors trust them, or will they start to worry that the endgame is either inflation or default, two tried-and-true ways other countries have escaped their debts? If it’s the latter, we’ll face a vicious circle of rising interest rates and budget deficits, squeezing the economy and potentially forcing abrupt and painful austerity measures.

And if, instead, the markets continue to give us the benefit of the doubt, relieving our politicians of the need to act: Circle 2016 on your calendar.

England of 2011 will like like England of 1931

Stinging critique of David Cameron’s deficit fighting by Paul Krugman

Both the new British budget announced on Wednesday and the rhetoric that accompanied the announcement might have come straight from the desk of Andrew Mellon, the Treasury secretary who told President Herbert Hoover to fight the Depression by liquidating the farmers, liquidating the workers, and driving down wages. Or if you prefer more British precedents, it echoes the Snowden budget of 1931, which tried to restore confidence but ended up deepening the economic crisis.

The British government’s plan is bold, say the pundits — and so it is. But it boldly goes in exactly the wrong direction. It would cut government employment by 490,000 workers — the equivalent of almost three million layoffs in the United States — at a time when the private sector is in no position to provide alternative employment. It would slash spending at a time when private demand isn’t at all ready to take up the slack.

Why is the British government doing this? The real reason has a lot to do with ideology: the Tories are using the deficit as an excuse to downsize the welfare state. But the official rationale is that there is no alternative.

Indeed, there has been a noticeable change in the rhetoric of the government of Prime Minister David Cameron over the past few weeks — a shift from hope to fear. In his speech announcing the budget plan, George Osborne, the chancellor of the Exchequer, seemed to have given up on the confidence fairy — that is, on claims that the plan would have positive effects on employment and growth.

Instead, it was all about the apocalypse looming if Britain failed to go down this route. Never mind that British debt as a percentage of national income is actually below its historical average; never mind that British interest rates stayed low even as the nation’s budget deficit soared, reflecting the belief of investors that the country can and will get its finances under control. Britain, declared Mr. Osborne, was on the “brink of bankruptcy.”

What happens now? Maybe Britain will get lucky, and something will come along to rescue the economy. But the best guess is that Britain in 2011 will look like Britain in 1931, or the United States in 1937, or Japan in 1997. That is, premature fiscal austerity will lead to a renewed economic slump. As always, those who refuse to learn from the past are doomed to repeat it.

Move over California, Illinois is broke as well

From The New York Times

Viw of Chicago Even by the standards of this deficit-ridden state, Illinois’s comptroller, Daniel W. Hynes, faces an ugly balance sheet. Precisely how ugly becomes clear when he beckons you into his office to examine his daily briefing memo.

He picks the papers off his desk and points to a figure in red: $5.01 billion.

“This is what the state owes right now to schools, rehabilitation centers, child care, the state university — and it’s getting worse every single day,” he says in his downtown office.

Mr. Hynes shakes his head. “This is not some esoteric budget issue; we are not paying bills for absolutely essential services,” he says. “That is obscene.”

For the last few years, California stood more or less unchallenged as a symbol of the fiscal collapse of states during the recession.

Now Illinois has shouldered to the fore, as its dysfunctional political class refuses to pay the state’s bills and refuses to take the painful steps — cuts and tax increases — to close a deficit of at least $12 billion, equal to nearly half the state’s budget.

Of course the impact is more than on just Illinois

The federal dollars are nearly spent. Last month, local governments nationwide shed more than 20,000 jobs. Should the largest struggling states — like California, New York or Illinois — lay off tens of thousands more in coming months, or default on payments, the reverberations could badly damage a weakened economy and push housing prices down still further.

“You’re not seeing these states bounce back, and that could be a big drag on the national economy,” said Susan K. Urahn of the Pew Center on the States. “It could be a very tough decade.”

Here is what it looks like in real terms

The Community Counseling Centers of Chicago is another of those workaday groups that are like the stitches on a baseball, holding together poor and working-class neighborhoods. With an annual budget of $16 million, the agency tends to families torn by crime and violence as well as people who are psychologically stressed and abusing drugs.

On any given Monday morning, the agency’s chief administrative officer, John J. Troy, 61, has no idea how he is going to keep its doors open until Friday. He said the state had not come through with an expected $2.2 million, which is about six months of arrears. He has laid off and recalled employees three times in the last two years.

“Two weeks ago, I had days to meet my $420,000 payroll and all I was looking at was a $200,000 line of credit from a bank,” recalled Mr. Troy. “I drove down to Springfield and said, ‘Hey, you owe us $3 million.’ They said: ‘Oh, that’s nothing. We owe another agency $10 million.’ ”

“The fact of the matter is,” he added, “I don’t sleep much these days.”

I know that several current and former politicians across the country read this blog but I can’t think of a Canadian equivalent.  In reading about the second Devine government in Saskatchewan the province was pretty much broke but from what I recall, bills were being paid.  While the Ontario government had Rae Days, I am pretty sure the bills got paid.  Actually outside of the 1930s, I can’t think of a time when a Canadian government didn’t pay it’s bills.  Anyone have an example?

Deficits are Devine

Well it’s official, deficit financing on the scale not seen since the Devine era is back in Saskatchewan.  The government of Saskatchewan is going to run a billion dollar deficit this year based on the fall of potash prices.  As told by the Star Phoenix.

The release of the government’s mid-year financial report Thursday shows it now projecting it will take in only $109 million from potash royalties and taxes – $1.8 billion below what it forecast in its spring budget.

The government is now spending more than it is taking in, even with higher-than-expected oil royalties, tax revenues and federal transfers.

That has required a drawdown from the reserve Growth and Financial Security Fund of $564.3 million and a special dividend from Crown Investments Corp. of $460 million from the sale of the government’s share of SaskFerco.

However on a summary basis – which includes all of the operations of government including the Crowns – a deficit projected at $25 million at budget is now pegged at $1.05 billion.

The NDP were all over this today.  I’ll link to Cam Broten’s website who posted the NDP press release and response to the deficit.

I liked how it started.

With the release of the Mid-Year Financial Report, NDP Finance critic Trent Wotherspoon said the Wall government has confirmed that it is responsible for the biggest example of fiscal incompetence in the history of Saskatchewan. He said the combination of grossly inflated potash revenue projections, equity stripping from Crown Corporations, and out-of-control government spending has left the province with a $1 Billion deficit on a summary financial basis and a financial blunder not seen in generations.

“Private forecasters, industry representatives, and the NDP Opposition all cautioned against the fantasyland numbers the Wall government put forward in its budget,” Wotherspoon said. “But cheerleading and popular promises ruled the day with no thought as to whether or not the expert advice it received should have been taken into account.”

Then it gets a bit weird as it moves for attacking “out of control spending” and attacks spending cuts.

Wotherspoon said the Wall government’s fiscal mismanagement isn’t just about numbers on a page; people are being asked to pay for its incompetence through cuts to healthcare, education, rural programs, and their quality in life in general. He noted that among the cuts was $122 million from the construction of long-term care facilities in rural Saskatchewan and $32 million from new school infrastructure.

So on one hand the NDP are criticizing the Sask. Party for running a huge deficit (which they should) while at the other hand trying to get upset or cutting spending to keep government spending under control.

I have friends and I respect people in both parties and here is my advice on to handle the situation.

Saskatchewan Party: You missed your revenue predictions by $1.8 billion dollars.  I would fire whoever made that prediction because I agree with the NDP on this one, when you came out with this budget, you must have known it was going to be a bad year for potash prices.  Even I knew it was going to be a bad year for commodity prices going into a global recession.  To keep this from happening again, I would come up with an independent office of economic forecasters that would give guidance to the government that were outside the Ministry of Finance and therefore outside the influence of the political pressures that lead to really bad budget forecasting.  Don’t go half-way with this.  Give it legitimacy, give it some independence, and fund it properly.  I am not an economist but I know many of them have ideological bents on how the world is going to pan out and that is natural.  Even the best economists are also going to make mistakes.  I can accept that (not $1.8 billion dollar mistakes but some mistakes).   What I want to see as a voter and a taxpayer is a process in budget forcasting that is non-partisan and transparent.  This would go a long way in restoring some confidence in your budget predictions which have been questioned by the media for over a year. If you want us to trust you again, you need to take some steps to ensure you don’t miss your targets again.  Again, as a Saskatchewan voter and taxpayer I want to hear what your plan is to pay back your billion dollar boondoggle sooner rather than later.  It’s a lot of money and you are going to take a beating in the press and in the Legislature but it’s better to deal with it up front and head on and then move on then play political games with it.  Dealing with it this way will hopefully stop the comparisons to the Devine Tories of the 1980s.

Also, potash prices didn’t just fall last week.  I know you a governing party doesn’t want to give negative financial updates every month but it seems prudent during a time of unstable financial times to offer a more transparent accounting of the public purse in regards how we are doing compared to our predictions.

NDP: Maybe they should not use the same press release to attack out of control spending and then attacking spending cuts.  Use two pieces of paper and maybe send out two different press releases.  Despite not liking the wording and structure of their release, the NDP have the high ground here, as they are the ones that slayed the deficit that last time.  If I was the NDP, I would have a reunion luncheon with Roy Romanow, Janice MacKinnon, Eric Cline, and others who had to go through year after year of budget cuts to talk about how hard it was and the consequences of deficit financing in the Devine years had on the 1990s in Saskatchewan.  While you are at it, give out a lot of copies of Minding the Public Purse to remind us again how hard it was to make those cutbacks as a government but also to remind us voters how hard it was to see things we care about in Saskatchewan to be cut.  If I was Trent Wotherspoon, I would also use the term “billion dollar boondoggle” a lot in the days ahead but that is just me.  Boondoggle is such a great word.

For both parties, I would love to see a real debate on their visions for the future.  A future that involves peak oil, a liquidity crisis turning into a long term government debt crisis, a future where our federal government seems destined to burden all of us with long term debt (again), higher interest rates, cut transfer payments, and potentially higher unemployment.   Are we going to grow ourselves out of this mess (doubtful) or make drastic spending cuts?  Will we see a higher PST and income tax rates in our future?  Will the burden be put on businesses or individuals or will someone come up with a new path to take?  Tough times are ahead and it would be refreshing to hear the vision of both major parties in Saskatchewan (and for that matter, I would like to hear the Liberal Party vision as well) about the role of Saskatchewan in a smaller, less affluent world will look like.

Outrage at the deficit is all politics

Ian McDonald is saying what I have heard all this week about the deficit.

A federal deficit that was forecast at $34 billion as recently as the January budget is now projected to be a least $50 billion. That’s quite a miss, 50 per cent on the upside, from a finance department better known for underestimating the surplus during the era of the fiscal dividend.

Then again, as our editorial page noted the other day, $50 billion isn’t what it used to be. It doesn’t go far as it used to, either. Or in the immortal words of Yogi Berra, you get cash and it’s as good as money.

In the House of Commons, the opposition parties were shocked and appalled, demanding that Finance Minister Jim Flaherty either resign or be fired, his credibility in tatters, his competence destroyed.

Then the Liberals demanded that Flaherty add another $1 billion to the ballooning deficit by lifting regional variations on qualifying for Employment Insurance and imposing a national minimum standard.

And of course, the NDP would like Ottawa to guarantee the pensions of autoworkers that are on the table in talks to restructure the North American auto industry.

As for the Bloc, it just wants more money for Quebec, starting with the forestry industry.

In politics, you have to make more than the usual allowances for hypocrisy.

It was in January that Jack Layton and the entire Liberal party were screaming for an Obama like stimulus package (which would have required a $200 billion deficit to proportionately match).  While I am a deficit hawk and I hate seeing this much debt, 3% of GDP is not out of control if it is only short term.  Bank of Canada Governor David Dodge is saying the same thing.

“The Canadian federal deficit of 3 percent of GDP, in a year where the output gap is as large as it’s going to be, is certainly not inappropriate,” Dodge, a former deputy minister with the Finance Department, said in remarks at an economics conference in Toronto.

He went on to say that all Canadian jurisdictions need to commit to balancing their budgets after this mess is over and pay it off.  What frustrates me in all of this, we are missing out on the real debate which needs to happen during a financial recession and that is how do we get out of it and how do we best handle the suffering that comes with living in the Great Recession.  We need to have more discussions on the ramifications of the proposed changes to EI versus leaving it alone.

The Liberals have taken a position that is clear and easily explainable. To summarize, more pogey now. They want employment insurance, as we euphemistically call it, to be available anywhere across the country after only 360 hours of work. The Liberals believe 150,000 people would be helped by their policy, but the political benefit is even greater. The employment insurance system we have now is so complex and difficult to understand that any Canadian who fears losing his job would rightly worry about whether he would quality for payments. Expect the worriers to back the Liberal plan.

As it is now, Canadians must work between 420 and 700 hours to collect EI, depending on the rate of unemployment in the region in which they live. Those eligibility requirements mean that 40 per cent of people who pay into the plan aren’t actually able to collect. For EI purposes, the government has divided the country into 58 regions and length of time that EI will pay out varies by region.

The Conservatives have chosen to champion this absurdly complex system, although they certainly didn’t invent it. Liberal leader Michael Ignatieff wants change so Prime Minister Stephen Harper is against it. It’s as simple as that. The substance of the matter is irrelevant.

The side benefit of the pogey issue, perhaps accidental, is that people have actually started to pay a bit of attention to a big-ticket program that does need a serious rethink.

There are also other debates to had about taxation (did the Conservatives cut too much from the GST?) and why despite all of the stimulus money, we are still seeing serious job losses not only in Ontario but even in Alberta?  With our economy being battered by the problems in the United States, maybe it is time to rethink our economic relationship with the United States, I am not saying with become protectionists but rather ask ourselves is it is wise to be so closely hitched to an economy that could be in trouble for years to come?

What’s at Stake?

Several people sent me this link about what is at stake with the United States running $1 trillion deficits.

The non-partisan Congressional Budget Office has also said the U.S. budget deficit will swell to a record $1.186 trillion in fiscal-year 2009 and come in at $703 billion in the 2010 fiscal year, which begins October 1, 2009.

The actual budget gaps for both years may be significantly wider as Washington prepares to jolt the economy with stimulus spending that could total $775 billion over two years.

The following are several scenarios that could result from runaway budget deficits:

FALLING U.S. CREDIT RATINGS:

United States EconomyA string of trillion-dollar deficits could undermine investors’ faith that the U.S. government always pays its debts and put in danger the country’s triple-A credit ratings. This could lead foreign investors to shun U.S. Treasuries, the bonds the government sells on the open market to finance its borrowing. Treasuries are currently expensive by historic standards since the financial and economic turmoil of the past year has boosted their global appeal as a safe-haven investment. Serious danger to U.S. credit ratings could send the debt market downward and burst what some are calling a bond-market bubble.

SKY-HIGH INTEREST RATES:

A loss of faith in U.S. government bonds would send interest rates throughout the economy soaring since Treasuries serve as the benchmark for loans in the private sector. A rout in that market would dramatically lift the cost of borrowing for buying homes, cars and paying for university education. If it happens any time soon, this in turn would jeopardize the Federal Reserve’s efforts to stabilize the ailing economy.

Note: This is why I locked in mortgage…

DUMP THE DOLLAR:

A crisis of confidence in U.S. debt would devastate the dollar. The world’s reserve currency, the greenback is used globally by countries and companies to pay for a wide range of basic commodities, most notably oil. If investors dumped U.S. debt, they could do the same with the dollar. A dollar crisis might end its status as the preeminent currency of world commerce, deeply undermining its value and further raising the cost of borrowing for the United States.

SOARING INFLATION:

A plummeting dollar and sky-rocketing interest rates could push the inflation rate through the roof. The United States imports far more than it exports and would be hard pressed to pay for oil and manufactured goods it buys from abroad with the greenback’s value withering. Currently, though, rapidly falling prices, or deflation, appears to be a much more imminent problem than the more distant prospect of inflation.

FALLING GLOBAL STATUS:

A dollar and debt crisis would undoubtedly undermine the global standing of the United States, much of which is based on the fact that it is the world’s largest economy. If the United States lost the international reserve currency and the faith of global investors, little else might be left and the beacon of free-market capitalism might also dim.