Finance Minister Jim Flaherty tabled the federal government's budget in the House of Commons on Thursday afternoon. The fiscal plan focused on limited spending on areas like defence and international aid in order to tackle the whopping $56-billion deficit.
How do governments navigate budget politics in an era of deficits? How do they promote both targeted spending and fiscal restraint? How do they fend off the opposition and sell their vision to the public?
Earlier today, we invited readers to join us for an online discussion on budget strategy with Tom Flanagan, a University of Calgary political science professor and a former top Conservative official.
Prof. Flanagan was chief of staff to Stephen Harper in 2002-03 when he was leader of the Opposition, served as the Conservatives' national campaign manager for the 2004 election and worked as an advisor in the Conservatives' war room during the 2005-06 election campaign. He was also director of research for the Reform Party in the early 1990s.
He has also written several books, including Harper's Team, Waiting for the Wave: The Reform Party and Preston Manning and First Nations? Second Thoughts.
Read the full transcript of the discussion:
Jill Mahoney: Hello everyone. I'm Jill Mahoney and I'll be hosting our live discussion with Tom Flanagan today.
We'll get going shortly. In the meantime, please feel free to start submitting your questions.
12:56 Jill Mahoney: Professor Flanagan, thank you for joining us today. Let me start off our discussion by asking you what are the main challenges of crafting budgets in periods of fiscal restraint versus times of prosperity?
1:01 Tom Flanagan:
First, there has to be serious public demand for fiscal restraint. That usually happens only when deficits are spiralling out of control and the national currency is faced with devaluation. That's what happened to Canada in 1995. We aren't at that point now, so the government will deliver some mild restraint but not draconian cuts of the kind we experienced in the past.
1:02 [Comment From Blair ShumlichBlair Shumlich: ]
Thanks for taking the time to do this Prof. Flanagan. My question is this: If Harper had a majority today, what would we see differently?
1:04 Tom Flanagan: Blair, I think if there was a Conservative majority, the plan would probably move more quickly towards balancing the budget. But I still don't think it would be draconian. The conditions just aren't there. Canada's currency is strong, our debt is manageable, and people are more worried about things other than the deficit.
1:04 [Comment From GuestGuest: ]
Mr. Flanagan Cutting taxes seems like a conservative mantra. Indeed it often seems to me that it is their only economic plan. Now, I don't like paying taxes any more than anyone else, but would you agree that the country would be in much better shape if the government had not cut the GST while increasing its spending?
1:06 Tom Flanagan: I'll agree with you 50%. I think the Conservative tax cuts (and the GST cut was only part of a longer list including reductions to personal and corporate income tax) were well advised. But I do think the Harper government should have restrained its spending from the start. So they created a gap between revenue and expenditure.
1:07 Jill Mahoney: Read this Globe story on Prime Minister Stephen Harper's comments about putting off additional spending.
1:07 Jill Mahoney: Finance Minister Jim Flaherty is widely expected to unveil a budget today with a dual focus: Continued stimulus spending while tackling the huge $56-billion deficit. Are there inherent challenges in presenting two-headed budgets?
1:09 Tom Flanagan: Yes, the message gets muddled. It's hard to emphasize the need for restraint when you're still increasing spending and running a large deficit. I was never a fan of the stimulus program. In my view, Canada is doing better than countries such as the USA, UK, Japan, France, Italy, etc., precisely because we've had a smaller stimulus package. I would have preferred even smaller, but you never get everything you want.
1:10 [Comment From GuestGuest: ]
In order to bring the deficit to zero in a few years, taxes will likely have to be increased. Should these taxes be levied on business or on households?
1:12 Tom Flanagan: I don't accept the premise of the question. I think the budget can be balanced through control of expenditure. Economic growth appears to be returning at quite a reasonable pace, and that will do the job in a few years unless--and this is a big qualification--interest rates spike and drive up the cost of servicing the debt. That's what undermined Brian Mulroney's attempts at balancing the budget. He actually did a pretty good job of restraining spending (adjusted for inflation) but got overtaken by rising interest rates. That's the big unanswered question for Mr. Flaherty.
1:13 [Comment From R. CarriereR. Carriere: ]
Mr. Flanagan: Government after government when in financial difficulty,usually comes forth with slash and tax solutions. Seldom does one present a vision on how to increase the revenue line by innovation. That said, where do you see the "New" jobs appearing once the post stimulus spending and post recession come to an end?
1:15 Tom Flanagan: In my view--and I agree with the government on this--new jobs will emerge as the Canadian economy is made more efficient by reducing barriers to competition. The private sector will create jobs, just as it did in the great boom of the last decade.
1:15 [Comment From GuestGuest: ]
Many economists sneer at "balanced budget amendments" as inflexible and dangerous. But with so many jurisdictions - from California to Greece - unable to keep their fiscal houses in order, do you think some kind of permanent spending restraint is in order?
1:17 Tom Flanagan: I don't know about constitutional amendments, but balanced-budget legislation has proven to be ineffective. The politicians just repeal or amend the legislation when they feel the need for deficit spending. In my view, there are no technical solutions to questions of fiscal responsibility. The only solutions are political. Every generation has to re-fight this battle. I'm getting a little old for it, but I'm sure my students will do it again in their time!
1:18 [Comment From Blair ShumlichBlair Shumlich: ]
Virtually every expert--barring Jim Flaherty, who some would argue isn't necessarily an expert-- has said Canada can't grow its way out of this recession. The Conservatives and the Liberals have promised not to cut transfers to persons or provinces; they also won't raise taxes. How long do you see politics getting in the way of the right policy?
1:21 Tom Flanagan: I would partly agree with this. I suspect that the fiscal restraint we are going to see in this budget will be too limited to do the job completely. I don't think you can rule out half the budget (transfers to persons and provinces) from restraint. But we don't have to solve this problem all at once. If the current approach isn't working, there will be time to strengthen it because Canada is, generally speaking, in such good financial shape. I would be singing a different song, to be sure, if I were in some other countries.
1:21 [Comment From SvenSven: ]
Mr. Flanagan, have you received any flack from Tory circles over your comments that the Afghan prisoner transfer was the real reason Parliament was prorogued?
1:23 Tom Flanagan: No, my friends in government realize that I've gone back to my old role of being outspoken and making a general nuisance of myself. I don't think anyone takes it personally, at least after the heat of the moment has subsided.
1:23 [Comment From GuestGuest: ]
Dear Mr. Flanagan Do you feel the Conservatives have to work extra hard to sell their proposals because of a more-than-usual hostile press?
1:28 Tom Flanagan: Our situation in Canada is very different from the USA, where the national media are definitely liberal (except for Fox News). In Canada both the Sun chain and the CanWest papers tend to be sympathetic or at least open-minded toward the Conservatives. The Globe and Mail sometimes indulges in quixotic crusades against the government (e.g., prorogation) but is pretty fair overall. The Toronto Star is relentlessly hostile, but nobody ever said you could make friends with everyone. I would say that, compared to most countries with which I have any famiiarity, the Conservatives in Canada actually have friendly media to work with. It was different in the past, but that's the way it is now.
1:28 [Comment From Philip LovePhilip Love: ]
The government and banks have been recently indicating the need for households to monitor and put our spending under control based on growing debt levels. The old fashion approach has been to always save some money for a rainy day. How do you feel about creating a 'rainy day' fund so that (when) surpluses are generated, we can better deal with future situations similar to where we are now? Why is it the government seems to always want to spend at least all that they have?
Thursday March 4, 2010 1:30
1:31 Tom Flanagan: We have such a rainy day fund in Alberta. The problem with it is that it encourages politicians to delay doing anything until that fund is exhausted. But let's not get into politician-bashing. They are people just like us. They spend public money because that's the easiest way for them to put together the political coalitions they need to win. It's voters who are the problem, not politicans. As Pogo said, "We have met the enemy, and they are us."
1:31 [Comment From oliveiraoliveira: ]
sure would like to know how a conservative government allowed spending to get out of control (7%/year) and made tax cuts that were not prudent (ie. gst). Would be interested to hear your comments on these criticisms.
1:34 Tom Flanagan: Need to win, dude! The Conservatives would never have been elected in 2006 if they had run on a platform of fiscal restraint. They had to fulfill their promises to bind together the coalition they had forged in the campaign. Now they have to try to deal with some of the results. It's called politics.
1:34 [Comment From RonRon: ]
What can the government do to address the increasing labour productivity gap between Canada and the US?
1:37 Tom Flanagan: In my opinion, Canada's productivity problems arise from having too many anti-competitive features in our economy--provincial trade barriers, supply marketing for poultry and eggs, restrictions on foreign investment in communications, transportation, banking, etc. The government is on the right track in trying to address these issues, though we're talking about relatively small steps at the present time.
1:37 [Comment From PierrePierre: ]
What is your opinion about the structural deficit as suggested by Kevin Page?
Thursday March 4, 2010 1:38 Jill Mahoney
1:39 Tom Flanagan: I think Mr. Page is probably right. He's had a good track record thus far, so I tend to believe him. As I said above, I think the policy to be announced in this budget will probably not get the job entirely done and will have to be revisited in light of the structural deficit. But I think our situation allows us to move incrementally.
1:40 Jill Mahoney: Could you give us some more insight into the politics and strategy of budgetary restraint -- what do politicians consider when crafting difficult budgets?
1:43 Tom Flanagan: One thing they've learned is that they have to spread the pain around. It's very hard to sustain a cut if it appears to be unfairly aimed at some vulnerable group. That's what Ralph Klein did in the 1990s. He imposed a 5% salary cut on ALL public employees--not just nurses or teachers or civil servants but ALL of them (me included). Equally important, politicians have to be seen to suffer also. You have to create a mood of "We're all in this together."
1:44 [Comment From GuestGuest: ]
Is Inflation the biggest issue to be resolved for Canada? To me, it seems that with so much debt to be rolled over in the coming months/years, the reasonable expectation is that interest rates will begin to climb, perhaps even meteorically. How can the Gov't respond to this if it occurs?
1:46 Tom Flanagan: Inflation is the big unknown. What may save Canada is that our fiscal problems are so much smaller than those of other developed nations. We could become the new Switzerland as investors from other nations seek refuge in the Canadian dollar. That will create its own problems by driving up the price of our exports, but it may not be the classical high inflation/falling currency syndrome.
1:46 [Comment From GuestGuest: ]
What does the budget mean for First Nations and how will it help them get out of perpetual inertia?
1:49 Tom Flanagan: I don't think the budget will mean anything in particular for First Nations, nor will any budget. Their road to self-betterment runs in a different direction. See my new book, BEYOND THE INDIAN ACT: RESTORING ABORIGINAL PROPERTY RIGHTS, to be released on March 23. The First Nations need a legal framework that will allow them to make better use of the considerable assets that the Crown administers for their supposed benefit.
1:49 [Comment From JDJD: ]
Tom, in the next year, do you expect the tories to shift the agenda over to Health Care, as the media has finally started to notice the problems associated with the system.
1:51 Tom Flanagan: I wish it would be so, but I'm not holding my breath. Health care is still the third rail of Canadian politics. I don't think we'll get serious reform until lots of people are visibly dying from inability to get care. I hope I won't be one of them! I can't afford to pull a Danny Millions.
1:52 [Comment From Shades of GreyShades of Grey: ]
Tom, from a fiscal conservative and social liberal, thank you for your always interesting perspective. What in your mind are the areas the Harper government should be looking at major cuts to spending to tackle the deficit?
1:55 Tom Flanagan: In a world of pure policy, without taking politics into consideration, the most offensive parts of the Canadian federal budget are our massive subsidies to business, especially regional economic development, and equalization. The latter is particularly bad because it encourages insane policies in dependent provinces (e.g., absurdly cheap tuition and day care in Quebec). These are big-ticket items, involving tens of billions of dollars. But I see little hope for change. In order to get elected, Mr. Harper had to come to terms with business subsidies, which he originally opposed, and promise increases to equalization payments.
1:56 [Comment From GuestGuest: ]
While spending restraint is in order for today, government also has an opportunity to procure major infrastructure projects at a time when private sector orders are "soft"... this isn't short-term stimulus, but instead major spending to replace federal labs, correctional facilities and bridges for which major dollars wouldn't flow for another 2-4 years. Why do you suppose this government has been so reluctant to aggressively proceed at a time when they will get the best deals for taxpayers?
1:57 Tom Flanagan: The government did in fact target quite a bit of the stimulus package to infrastructure. It might have been more if they hadn't bailed out General Motors and Chrysler. Politics again!
1:58 Jill Mahoney: What strategies do you foresee the government using to sell this budget to the public? And how do you think it will deal with the opposition?
2:00 Tom Flanagan: I think the government will portray this as a balanced approach--continued stimulus, but gradual movement toward control of the deficit, combined with measures to improve productivity. As far as the opposition is concerned, they only have to get the Liberals to support it. Mr Ignatieff will huff and puff, but he has to vote for it unless he wants an election, and I don't think he does. Layton and Duceppe will posture because they know the Liberals will keep the government in power. Enjoy the spectacle. It's more entertaining than a lot of recent movies.
2:00 Jill Mahoney: Thank you for joining us, Prof. Flanagan. Is there anything else you would like to leave us with today?
2:03 Tom Flanagan: I've indicated disagreement with many government policies, but I'm actually very confident about Canada's future. I think we're in better shape than almost any other country. The government deserves a lot of credit for its measured response thus far to the recession. It may not have been perfect by my standards (and why should anyone care about my standards?), but it's been much better than what governments in most other countries have done.