Financial crises are a real drag. They pull down economies very quickly, but recovery is prolonged, tough and uncertain.
That tough recovery provides the context for Friday's Speech from the Throne and, more important, Monday's budget. The economic picture has soured from the pre-election budget to today, especially the economic news from the United States. The souring will mean much harder decisions for Stephen Harper's government than it appeared would be necessary a few months ago.
Earlier this year, it appeared the U.S. economy was steadily recovering from the devastating financial meltdown. Now, job growth has stalled, the housing market is tipping back into massive default, the Federal Reserve has run out of monetary tricks, states and municipalities continue to lay people off, and the gridlock around the gigantic federal deficit remains as entrenched as ever. There is no way for Canada not to be adversely affected by any slowdown in the United States.
In Europe, growth is slow almost everywhere, except perhaps Germany and Scandinavia. The Greek debt crisis hangs over the European Union. New loans are being talked about for Greece in return for massive privatizations and even tougher austerity - measures designed to prevent a default that would hit German, French and other banks that hold Greek debts.
Developing countries such as China, India, Brazil and Turkey are doing much better, creating a two-speed recovery from the crisis. Their recovery pushes up commodity prices, which is good news for some parts of Canada (oil-producing, mining and farming-export areas) but bad for other parts.
The high Canadian dollar obviously hurts manufacturing. Later this year, the Bank of Canada will almost certainly begin raising interest rates. Provincial governments will have to restrain spending to get their swollen deficits down. Nowhere will this be more essential than Ontario, no matter which party wins its October election - even if no party will explain this reality to voters beforehand.
Uncertainties therefore abound about the international and domestic economies, as Finance Minister Jim Flaherty has been saying for several weeks. The uncertainties mean, in particular, that the government's balanced-budget pledge will either have to be delayed or, more likely, implemented with more severe spending cuts than were suggested in the pre-election budget.
Even then, it seemed highly implausible that $4-billion could be stripped from $80-billion of discretionary spending, as the budget forecast, by reducing administrative costs and not hiring to replace retiring public servants. As soon as the election was over, the government began to say that something more would be required, which is what everyone who studies public finance knew all along, the point having been underscored by the Parliamentary Budget Office. The budget will therefore likely contain language designed to prepare Canadians for cutbacks.
Some of the promises in the Speech from the Throne are cheap, even free, such as fixing terms for senators. Other seemingly inexpensive measures such as those in the "tough on crime" agenda actually have large costs attached to them - costs the government never fully explained. These costs will certainly dwarf the saving of $27-million from eliminating public subsidies for political parties, a measure that will be included in Monday's budget.
This summer, a subcommittee under Treasury Board President Tony Clement will begin reviewing government spending, with cuts presumably to be contained in the budget of 2012. These cutting exercises have failed more often than not in Ottawa. The Conservatives now have a majority government that should steel their resolve, but they have also been a party that let spending rip before the recession.
Hard spending decisions have never been a hallmark of Mr. Harper's governments, which have cut taxes, dramatically increased the number of civil servants, driven up spending, eliminated the surplus and produced big deficits, but will now be preaching restraint and cutbacks.
Throne Speeches are always try to be uplifting and the budget will speak of the electorate's support - and therefore vindication - for the government's economic approach. More uncertain economic times, however, will make for harder decisions ahead than the Throne Speech or the last budget suggested.Report Typo/Error
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