Germany Chastises Canada, Sort Of…

Germany reiterated calls today for Canada to participate in the beefing of the IMF funding. The IMF is currently seeking to raise its war chest to 430 Billion dollars in preparation of possible new bail-outs in Europe to serve as a firewall against liquidity contagion of sovereign debt financing. Canadian Prime Minister Stephen Harper and his finance minister Jim Flaherty have resisted demands for the country to participate. While Canada has received praised from Germany for its take on austerity it continues to be admonished for showing little ‘solidarity’ in matters of bailing out Europe.

Harper has repeatedly said that taxpayers in Canada would not participate in financing the welfare state of some of the Richest nations of the World. It must be noted however that Germany is showing a little lack of consistency in its criticism. Much of the political difficulties in the current European sovereign debt crisis stems from Berlin’s refusal to risk its own taxpayer moneys on alleviating required austerity in the Eurozone periphery, so how can Angela Merkel, Germany’s Chancellor, turn around and ask of Canadians what it won’t ask of its own people.

When a country goes bankrupt it makes sense to stabilize that country’s finances and currency through an IMF led debt restructuring with the objective in mind to return that country to a sustainable growth path and government spending. But when the World is faced with the likes of Greece whose sense of state welfare entitlement is so strong that it refuses the policy prescriptions attached to IMF lending, why should the World backstop its governmental spending. European style welfare states require generous taxpayer funding and strong longterm growth to be sustainable, countries desirous of receiving lending from the IMF must accept a model that both generates growth and taxes heavily. For countries to achieve those dual requirements they cannot be hampered by distorted fiscal incentives, which lax IMF lending standards embody.

It should be unacceptable that the IMF, funded by every country in the World including its poorest, should serve as a tool to preserve un merited entitlements in the richest nations of the World. The Conservative governments stand is that the IMF should only serve the Worlds poorest governments, this isn’t right, the World Bank is there to help the poorest, the IMF’s role should be to stabilize the World’s financial system by increasing sovereign liquidity to governments hampered by temporary market pressures.  But Harper is right with regards to who those fledging governments are.

Spain is a prime example of a relatively responsible government facing pressures outside its control and in need of a temporary backstop. Greece however is the antithesis of a responsible nation, underserving of outside help since all its problems are internal. Canada should increase its participation in funding the IMF, but this extra funding should come with conditions. Those conditions should be that the IMF serve strictly the needs of governments willing to accept the longterm rebalancing of their public expenditures, as has been the historical norm. Countries that dither and object to bail-out conditions ex-post, should be blacklisted so that the IMF may concentrate its ressources on countries like Spain who can actually benefit from it and Ireland who has shown responsibility and a willingness to proactively deserve it.

Germany has made many correct economic arguments over the course of the current crisis, let’s hope she can continue to make them consistently going foreword.

A Conservative Budget

Minister Flaherty scratching his shoe instead of his head

This was probably one of the more tame federal budgets in decades. Although it may be spilling a lot of ink now, expect the upheaval to be very short lived. While the Opposition may pay a little more attention than most to the budget, it is so unremarkable that they will probably return to criticizing such bills as C-10 and C-30 and keep the focus on the Robocalls scandal. As unremarkable as this budget may be, like all budgets it deserves much scrutiny for what was in it, what wasn’t and why its measures are so incremental.

Before we begin scrutinizing the budgets fine print, it must be said that the budget speech had one element in it deserving much praise. Rising up in the house of Commons to deliver his budget, Finance Minister Jim Flaherty spoke often of Canada’s fiscal leadership among industrialized nations. He noted recurring that Canada led the G7 in some manner or form when it came to public finance. Something in the rhetoric changed. After lavishing his government with much praise he proceeded to explain that Canada could not only benchmark itself against the wealthiest nations of the World, but should also compare itself with the ‘fastest’ and most dynamic growing nations of the World. It seems that if anything the conservatives have at least learned that comparing oneself to the wealthiest is no sign of merit when they are the economies that are the most stagnant in the World. This kind of talk can only lead to policy better aligned with the realities of the 21st century World dynamic.

Moving on to some of the less praise worthy moments of yesterday, let’s look at some of the new policies introduced and their short comings. In an effort to fill the glut of job openings in the western provinces the federal government will move to enhance immigration matching. The intentions of the action are praise worthy, the means may also be effective and fair, however one solution has not been explored. Employment insurance in Canada is atomized. While the program is national in scope and the premiums equal in all provinces, the hours contributed necessary for eligibility vary widely across regions, payout lengths are also regionally discriminatory. The result of this is while unemployment remains elevated in eastern Canada, job openings go unfilled in the west. Canada’s EI system encourages Canadians not to move to seek employment it encourages regional structural unemployment. So while the Premier of Saskatchewan is off in Ireland to go recruit that countries skilled unemployed labourers Newfies sit at home cashing in the dole waiting for the fishing season to start again. With standardization of EI across Canada the government could have hit two birds with one stone: reduce lost output in the west because of labour shortages and reduced unemployment in the east because of -job shortages. Than economist say they are puzzled with Canada’s international un-competitiveness, simply shameful.

Another issue Minister Flaherty often raises is the problem of an over heating real-estate market. No signs of cooling down the next Canadian Bubble. While almost all agree Vancouver and Toronto’s markets are over heating and the country is building condos at a breakneck pace, the minister choses to do nothing about it in his budget. The simplest and most efficient way to calm down the real estate market AND reduce the deficit would have been to phase out interest deductibility. This would in a sense incentivise the deleveraging of the entire Canadian economy which could have adverse effects on output if implemented too fast. A measured and gradual elimination of interest deductibility would reduce the tax incentive to speculate with borrowed money hence reducing leverage (bad), speculation, (bad), bubbles (bad) and the deficit (bad). So in fact this could have been a 4 birds 1 stone kind of solution.

One categorically adverse proposition in the budget has to do with the new R&D regime. The current plethora of R&D programs cost Canada $3 Billion or so. The Jenkins Report submitted to the federal government essentially called the money wasteful. The report stated that the money wasn’t helping to foster technology or competitive improvements. While a simple solution would have been to scrap this corporate welfare all together and just drop the corporate tax rate proportionally to the savings, the government decided to go down another path. The Conservatives chose to transform the R&D tax credits into direct subsidies. Completely reprehensible and irresponsible. Not only will bureaucrats start picking winners and losers. The R&D programs will now be open to graft, bribery or political interference as has been seen in other jurisdictions. Canadians often admonish Americans for not emulating their successful policies. Well I think it appropriate for Americans to admonish Canadians for emulating their failures. That the federal government hasn’t heard of Solyndra, a near household name down south, is a testament to narrow vision. At least government intervention, interference and market distortion seems to stop there in this budget.

Corporate and personal taxes not part of the plan, eh? No new corporate tax rate reductions planned. This is probably the Conservatives not adding salt to their unions wounds. Why unions love corporate taxes is still beyond me, but in any case no drops in personal and corporate taxes are envisioned. This is objectionable. The corporate tax remains one of the largest sources of economic inefficiencies  and a double tax on the wealthy and middle class. Any lack of effort on this front is meritorious of its own lambasting post. Canada remains middle of the pack in the OECD in terms of corporate taxes, as the Finance Minister said himself we need to compete aggressively with the up and coming economic powers of tomorrow not the stale economies of the yesterday.

The cuts to government departments’ operating budgets are mild and inconsequential to say the least. As has been mentioned by other commentators, the cuts in civil service employment levels do not even match the Conservatives hirings since 2006. Canada will still be saddled with more bureaucrats than before the Conservatives took office. The planned yearly operating efficiencies of $5.2 Billion. When Canadians were being fed numbers between 4 and 10 Billion dollars the actual number is only conservative in its timidity and aversion too splashiness. In terms of defining themselves as fiscal conservatives, the governments efforts are halfhearted at best. Some of the long term efforts at spending consolidation deserve applause: OAS change from 65 to 67, enhanced OAS benefits after 70 and all civil servants increased pension plan contribution. The short term efforts leave many, including the Canadian Taxpayers Association, short of admiration.

One important announcement, although not budgetary in nature, will surely get greeno Mulcair riled up. The government’s plan to cap all environmental reviews to 24 months (thats two whole years for those not paying attention) is a great boon to Canada. Let’s just admit it their is no reason (even for environmentalists) to want businesses to expand resources, government bureaucrats to waste time and the Canadian economy to lose steam just so that great business projects get merely slowed down by our overly stringent and public review system. That’s not to say that when talking about Canada’s pristine Wild we should all be environmentalist, but when an energy project is good and going to get approved anyway why waste everybody’s time. Seriously Green Peace, the Oil Sands may be bad (I didn’t say are, I said maybe) they’re a bleep in the environments radar, you should be scared of China’s industrialization, not northern Alberta’s botox gone awry.

The bottom line is that this is a timid, non-game changer budget. This is not how to win fiscal conservatives votes. This is not how to improve fiscal or macro-prudential policy. None the less it’s not a terrible budget, there is more good than bad. Let’s hope this budget is popular enough to convince people to let the Conservatives do what they got elected to do: Make government smaller!

Shout out to our Malaysian readers,

Cius