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Editorials On the deficit, Canada’s running a surplus – of politics

Federal NDP Leader Tom Mulcair speaks to supporters during a rally in Halifax on Sunday, Aug.30, 2015.

Darren Pittman/The Canadian Press

The Federal Balanced Budget Act, a bit of political grandstanding and bogus economics the Conservatives stuffed into this year's omnibus budget bill, lays out a list of punishments to be visited on any government that runs a deficit: The finance minister will have to appear before Parliament to atone for his sins, departments will have their salary budgets frozen, and ministers and deputy ministers will be hit with a five-per-cent pay cut. But an exception is made in the case of a recession. The act defines a recession as "a period of at least two consecutive quarters of negative growth in real gross domestic product for Canada, as reported by Statistics Canada."

On Tuesday morning, Statistics Canada reported. As expected, the country is, technically and legally, in a recession. Or at least it was in a recession, with an economy that contracted 0.8 per cent on an annualized basis in the first quarter, declining by another 0.5 per cent in the second quarter. The pullback was almost entirely caused by the collapse in oil prices, which led to a collapse in business investment in the energy sector. Much of the rest of the Canadian economy was still growing in the first half of the year, albeit slowly. And growth even picked up in June, which is why the Bank of Canada and most private-sector economists think the just-announced downturn is already something to be spoken of in the past tense, with (slow) growth expected for the rest of the year and next.

So it is, or was, a recession-lite kind of recession. And if we're lucky, it's already over. But even if the economy only pulled back a bit, and even if it's growing now, albeit slowly, it still shrank for two consecutive quarters. And that's a recession. Hey, it's the law. And the Conservatives wrote it.

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All of which poses some challenges for the Election 2015 script.

Consider the Conservative strategy: The governing party is running on slogans like "Proven Leadership for a Strong Economy." As proof of Leadership, it promised a balanced budget this year. But the not-so-strong economy means the budget will almost certainly record a small deficit in 2015-16, unless the government brings in a round of last-minute cuts in an economically counterproductive attempt at satisfying a purely political promise. The thing is, if the economy is (or was) in a recession, and ended up there because of a pullback in private-sector spending, then the last thing a government should do is institute a round of public-sector cutbacks. All else equal, that would only make a mediocre economic situation slightly worse.

But the Conservative Party is not the only one whose political rhetoric has not caught up with economic reality. Each of the major parties is, to some extent, trying to talk out of both sides of its mouth on deficits, recessions and the relationship between the two. There's a lot of hypocrisy to go around.

Take the New Democrats. Tom Mulcair is smilingly promising the seemingly impossible, the certainly unnecessary and the probably counterproductive: a balanced budget in the first year of an NDP mandate. The NDP has yet to release a fully costed platform but, as things now stand, its pledge does not appear to be arithmetically credible. More importantly, given the state of the economy, the pledge is economically uncalled for, or worse. Canada enjoys a low debt-to-GDP ratio, and it will continue to fall even if the country runs a small deficit, so there's no need to rush to balance.

But the NDP's promise, driven by the need to reassure middle-of-the-road voters that New Democrats will on this point be as conservative as the Conservatives, was not written to satisfy economists. If the country is suffering from a recession – the second of Mr. Harper's mandate, as Mr. Mulcair likes to remind listeners – then the NDP should be promising a deficit, not foreswearing one.

Or consider the Liberals. They are proudly promising deficits over the next three years, correctly pointing out that the deficit obsessions of 1995 are misplaced, because it's not 1995 any more. But at the same time, they're sending out the hero of the 1990s, former finance minister Paul Martin, to attack Mr. Harper as "the King of Deficits." In a rational universe, the Liberals would be congratulating him for that part of his record. And Mr. Harper would be accepting the crown. When the worst recession since the Great Depression hit in 2008, his minority government, urged on by the NDP and the Liberals, did the right thing: It ramped up spending, stimulated the economy, ran a huge deficit, and only brought it down slowly over many years, as the economy recovered. All hail the King.

But Conservative ideology and strategy won't allow Mr. Harper to claim credit for what he got right in 2008. Instead, he's crowing about a reported $5-billion surplus in the first three months of 2015 – a record of spending reduction that, if sustained in this recession-ish year, would deserve condemnation, not praise. Politics makes for strange ideological bedfellows, and novel hypocrisies.

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