A pall of unjustified smugness has hung over Canada since the 2008-2009 recession.
Yes, Canada entered the recession in better fiscal shape than any industrialized economy, courtesy of wise decisions by the federal government taken in the mid- to late 1990s. Yes, the country's banks were properly regulated. And, yes, higher commodity prices underpinned the Canadian economy.
But there was so much political smugness in the air – what with all the talk about Ottawa's oversold Economic Action Plan and the sturdiness of the Canadian banking sector – it was easy to miss underlying problems.
The most obvious was, and is, that Canada itself amassed large amounts of debt and saw unemployment rise. Every government in Canada went into deficit, from which the climb has been long. That climb now threatens to reverse itself for another reason: the general condition of the world economy, especially the United States.
Governments planned their climb from deficit to balanced budget largely on buoyant economic growth (and higher oil prices), not sustained spending restraint or higher taxes. Those predictions were foolishly optimistic, given the grave uncertainties in the world economy. But they served a political purpose by suggesting to voters that all would be well without any pain or sacrifice on their part.
We see this most clearly today in the Ontario election, where all of the parties' platforms are built on fairy-tale expectations of economic growth. We saw it, too, in May's federal election, during which platforms were built on growth projections from the last Conservative budget that flew in the face of the turbulent world economy.
In both cases (and in other provincial budgets), budgetary prudence yielded to an unjustified belief in the sturdiness of a world recovery – a belief that defied the known dangers of massive indebtedness, political gridlock, high unemployment and, most critically, everything that economic historians had taught about the prolonged and arduous recovery from recessions caused by financial collapse.
It was obvious that the Harper government's deficit-reduction track could not be accomplished without spending cuts, but the government refused to talk about this reality during the campaign. Instead, it counted on stable growth to do most of the work, and now that growth track has vanished. The government will either have to cut more or punt its balanced-budget projection.
The Western world is awash in debt that, in many places, can only be serviced (and the gods of the ratings agencies satisfied) by sharp reductions in spending and/or tax increases. These measures compound slow economic growth, which, in turn, depresses government revenues.
In the European Union's major countries (Germany and Poland excepted), economic conditions are weak or disastrous. Greece ought to have defaulted a while ago, but, instead, is being kept afloat (sort of) by jerry-rigged loans, the continuing appetite for which in Germany, Europe's paymaster, has disappeared. Banks in Italy and France have been downgraded; Spain is on credit watch; and Britain's outlook goes from weak to weaker.
The U.S. has an unemployment rate of 9.1 per cent, a burgeoning debt, huge deficits, and dysfunctional politics. To imagine that Canada could remain immune from these doleful economic surroundings was fanciful. Canada was going to sink, the only question being by how much.
Another slowdown in Europe and the U.S. would mean fewer exports and likely lower commodity prices. High unemployment, especially in the U.S., would mean reduced purchasing power, which would depress exports. High Canadian personal debt levels would mean fragile spending intentions by consumers. High government deficits would inevitably mean public spending restraint.
True, some emerging economies such as Mexico, Brazil, India and China were showing strong growth. But for all the talk about Canadian businesses penetrating these markets, their share of Canadian exports remains small, too small.
This political business of always highlighting how much better Canada has been doing than other countries obscures the fact that deficits and unemployment have grown here, too, and that the outlook for economic growth is poor.
There are already opposition calls in Parliament to throw unspecified additional billions of public money into the economy that, frankly, would make very little difference to the country's economic performance, given the turbulence around us.