Canada: a relatively strong fiscal position

Monday, April 13, 2009

The biggest problem with fiscal policy is: with stimulus spending approved, the quickest and most efficient spending are often somewhat at odds. The Canadian government, with its approved fiscal stimulus, must make similar spending decisions on speed and efficiency. However, the Canada government has been saving since 1996, putting it in a relatively strong position compared to others. From the Globe and Mail:

About half of the combined federal-provincial stimulus this year is pegged to go toward infrastructure, and almost all of the provincial governments' $12-billion in recession-fighting dollars over two years is headed in that direction, says Derek Burleton, director of economic analysis at Toronto-Dominion Bank.

Still, doubts linger that governments will be able to spend the money quickly and efficiently enough to meaningfully ease the pain of recession.

One of the thorniest issues facing policy makers around the world is how to make sure the massive debts they're taking on to deal with the global crisis will actually be an effective fix. The issue is even trickier for Canada, since the source of the crisis lies mainly outside the country's borders.

Some commentators, including former Bank of Canada governor David Dodge and theorist Richard Florida at the University of Toronto's Rotman School of Management, have argued that stimulus focused so intently on bricks and mortar does not spread the money widely enough or with a long-term view about how to position Canada for the future.

"It would make far greater sense to invest precious infrastructure dollars in high-speed rail and broadband Internet lines to connect our communities than in roads and highways," Mr. Florida wrote in a recent essay. "We will begin to move toward a durable recovery only when we stop unnecessarily propping up the old economy."

Still, if the money is spent on schedule it should come at an opportune time - just as unemployment in the construction industry soars and private investment in residential and non-residential construction pulls back sharply, says Douglas Porter, deputy chief economist at
BMO Nesbitt Burns. "There are some areas of the country that could really use this kind of infrastructure boost," he said.

For some governments, like Canada, debt reduction has been a top priority in the recent past. The chart above illustrates Canada's net federal debt position - total outstanding debt minus assets - as a percentage of GDP. Net debt as a share of GDP fell from 69.2% in 1996 to just 30.6% in 2008.

When the U.S. economy (Canada's biggest trading partner) had already fallen into recession, Finance Minister Flaherty said this about Canada's 2008 budget, titled Responsible Leadership for Uncertain Times: “Some would have us go down the path to higher spending, higher interest payments and higher taxes. That approach is misguided. Our Government is taking the path that requires focus, prudence and discipline.”

2009 will be in sharp contrast to the recent past. Deficit spending of federal and provincial governments is expected to total $57 billion CAD - 3.7% of GDP or the biggest ever - on stabilization spending and the stimulus bill. However, compared to other governments, whose economies are in worse shape, the Canada's prudent attention to finances puts it in a better position to respond to the economic downturn.

The chart illustrates the UK government net debt as a percentage of GDP, a comparable measure of debt to the Canadian chart. Where Canada's debt to GDP ratio has fallen steadily since 1996, UK national debt has generally trended upward since 2002.

Even though the Canadian government must make the same fiscal concessions as any other government - timing and efficiency - its recent and relative frugality puts it in a unique position to spend.

Rebecca Wilder


stephen saines April 13, 2009 at 2:31 PM  

Rebecca: As always, you write very well on Cdn economic affairs, Canada makes a very good model for the US to view, not that the economies are so similar (they're not) but that the *social values* are so similar, especially if you compare Provinces to States.

Massachusetts, for instance, is well to the 'left' of say, Alberta.

That could involve a lengthy discussion in itself (and perhaps should) but let me comment on something yourt post included:
["It would make far greater sense to invest precious infrastructure dollars in high-speed rail and broadband Internet lines to connect our communities than in roads and highways," Mr. Florida wrote in a recent essay. "We will begin to move toward a durable recovery only when we stop unnecessarily propping up the old economy."]

I have always found Florida a fascinating study. Like many transplanted Americans here (he's from, most recently Detroit, and his wife is a Detroit native) he brings dynamic visions with him (something many Americans bring to this nation, an essential element that few, if any. other immigrant groups bring) (I'm British, btw, albeit the latest UK Passport requirements are the straw that breaks the camel's back on that, I'm taking out my Cdn citizenship almost immediately).

In many ways, Florida accredits Canada with having a clean page to accomplish what debt in the US is denying the US!

It is therefore very apt that you post what you do! I was fortunate enough to catch Florida expounding the very points made in his essay (and a number of his books) on the CBC's "The Hour".

I will look to see if I can find the video in archives, and post the link. Florida is an extremely likable and positive person. His major goal in life at this point? To show Cdns that this nation is holding a winning hand.

As always, I must point out though, it is not the present Neo-Cons who are responsible for Canada's fiscal health. That goes to Paul Martin, and his task was not a likeable one: austerity for over a decade.

Ironically, for all the dogma the Neo-Cons here proffer, their spending (bribing the electorate) is far greater than the Liberal's ever was!

Paul Martin was also instrumental in establishing the G20. It is a true shame that mishandling proved the man's political demise.

Btw: The Toronto Star carried a story a few weeks back, I should check my bookmarks, albeit I'm sure it was a Statcan release, to show that the US share of Cdn exports has shrunk noticeably (down to about 66% from 75% over a few years) and the gain has been the ROW, much of that China.

Hearsay counts for little, if anything, I will attempt to find that and post it. It is an integral part of your discussion.

Excellent post, Rebecca!

I'll be back later with more linked reference.

stephen saines April 13, 2009 at 2:48 PM  

Richard Florida interviews at "The Hour"

See also:

Anonymous April 13, 2009 at 3:39 PM  

I must correct a small piece of misinformation I posted prior: Richard Florida is most recently from Washington DC, not Detroit.

I'm not feeling my best, post Pneumonia with complicated causes, and having a bad day and unable to spend too much time digging for exact reference, so the following is second-hand. I dread searching the database of established orgs after being spoiled by Google, so the following will have to remain second-person as per reference.

[Canadian reliance on U.S. trade declines in 2008: StatsCan
Fri Apr 3, 8:45 AM
The Canadian Press

OTTAWA - Canada's reliance on the United States as a trading partner fell even further in 2008 as American automobile and housing markets declined during the economic downturn.

Statistics Canada reports the United States accounted for less than two-thirds - 65.7 per cent - of Canada's total merchandise trade (exports and imports combined) in 2008.

That's down from 67.2 per cent in 2007 and 74 per cent in 2003.

The agency says exports to countries other than the United States have been growing for six years, representing 22.3 per cent of total exports in 2008, up from 14.3 per cent in 2003.

Leading the gain for Canada's exports from 2007 to 2008 were the Asia Pacific countries - mainly Japan - and Brazil.

Exports to Japan increased 20.2 per cent from 2007 to $11.1 billion, driven by coal, canola, and wheat, while exports to China totalled $10.4 billion in 2008, up 9.1 per cent.

Canada's exports to Brazil increased 70.7 per cent from 2007, led by potash, used as a fertilizer, as well as coal and newsprint.

Similarly, imports from countries other than the United States have been on the rise for seven years, accounting for 47.6 per cent of Canada's total imports in 2008, up from 39.4 in 2003.

Imports from countries other than the United States rose by 10.7 per cent in 2008 compared with a year earlier, led by continued growth from China, Canada's second-most important trading partner for imports, behind the United States.

Chinese companies sold $42.6 billion worth of merchandise to Canada last year, up 11.3 per cent from 2007. Telecommunications equipment, games, toys and computers were the main goods imported from China.]

This plays into the discredited notion of 'decoupling', which apparently is not manifesting as many thought it would, but other facets of the same mechanism are at play. As the US takes herself of off 'steroids'...the importance to World Trade, and thus Commerce, diminishes accordingly.

All of this ties in exquisitely with Richard Florida's views. It is *regions* more than nations that will bear the fruits of a new economic order.

Steve Saines
(I'm tired of fighting with Blogger ID BS....tried five times to post under my proper ID but the tag isn't being recognized)

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