OTTAWA — In Jim Flaherty's world, there are a few simple truths: (a) come hell, high water, pestilence or hurricane, he will not be the guy who lets the federal government slip back into the red; (b) that holds true even if Ontario's economy enters a full-blown contraction; and (c) in the event of recession, it's all Dalton McGuinty's fault, anyway.
Each of these beliefs shaped Budget 2008, which, for business, might be the least-significant budget in years. The important stuff was in the real budget – last October's economic statement, which promised major cuts to personal and corporate income taxes, the latter to be phased in between now and 2012.
In the four months since, things have unfolded rather brutally for Wall Street, Bay Street, and pretty much anyone who owns real estate in the United States. Recession talk has reached a fever pitch. The Finance Department, at the time of last year's budget, was forecasting U.S. economic growth of nearly 3 per cent for 2008. This year, that projection has been sliced in half: 1.5 per cent for the U.S., with 1.7 per cent growth for Canada. And the risks, as the budget plan says, are “tiled to the downside.”
For now, though, as far as Ottawa is concerned, no recession is in sight – at least nothing more than a brief, shallow one, isolated to small parts of the country. That's an optimistic view, though it helps explain why Mr. Flaherty did not feel compelled to offer more than spare change to aid the manufacturing sector.
Related Articles
Forestry got $10-million over two years, which is $14-million less than the Tories will hand over to the Quebec tourism industry to spend on God-knows-what (something to attract international cruise ships, we're told). The car companies will get $50-million a year for five years to help develop green vehicles. It sounds nice, but in an industry as capital-intensive as autos, that amount is likely to have about as much impact as last budget's surprise “feebate” scheme for efficient cars – which is to say, almost none. Even the manufacturers' wish for bigger tax writeoffs on equipment was only partially fulfilled.
Why not more? Having granted large tax cuts in the fall, when the economic picture was brighter, he has little margin of safety now. The projected surplus for the coming year is only $2.3-billion. And even if the Finance Minister was open-minded to running a deficit, the political culture in the capital is now paranoid of them.
“It has now become so sacrosanct and political gospel to run surpluses, no matter what the economic situation,” said Jeff Rubin, chief economist at CIBC World Markets, who thinks the Tories ought to be prepared to be more flexible about spending. “One day, we are really going to f — k ourselves with this.”
Mr. Flaherty's skinflint approach to the factory sector also shows that he's a realist. Manufacturing's decline — from about 21 per cent of gross domestic product in the early 1970s to roughly 15 per cent – is not something you can reverse with subsidies. Every other major industrialized country suffers the same fate. “The positive side is, they're not going to be wasting $800- to $900-million on an industry that can't be resuscitated,” Mr. Rubin.
But there's also political edge to the minister's refusal to play along with the Ontario Liberal government's approach of setting up large, directed funds to support the automakers and other high-profile industries, Mr. Flaherty has punted the province's economic woes straight back to Mr. McGuinty.
The Tories' message is: if you want to write big cheques to Chrysler, Dalton, knock yourself out. If you want to spend yourself back into deficit, feel free. But leave us out of it. And while you're at it, perhaps you'd like to also explain why Ontario has one of the highest tax rates on investment of any province in the country. In fact, the Conservatives were again harping on an old theme yesterday – the need for sales tax reform in Ontario and four other provinces, as a way to boost their economies.
They're dead right on that issue. But it's easy enough for Mr. Flaherty to sit there in Ottawa, with its decade's worth of budget surpluses and its shrinking debt, to say that he's got it right and Ontario's got it wrong. You'd have to think some of his smugness would disappear if the government's no-recession forecast proves wrong.
