Some days, Stephen Harper and Tony Abbott could switch places and nobody would notice.
Canada's Prime Minister and his Australian counterpart share the same conservative ideology, contempt for carbon taxes and disdain for their public broadcaster. They've both played the national security card in the wake of terrorist attacks. Both preach the value of fiscal rectitude.
They also face a remarkably similar economic challenge, a precipitous slide in the price of their countries' principal export commodity that has led to cratering business investment and a weakening economy. Both have watched their central banks chop interest rates twice this year.
Where these two leaders differ, however, is in how they have chosen to react to changing economic circumstances. Mr. Harper clings to his promise to balance the federal budget this year. But Mr. Abbott, elected in 2013 on a vow to reverse a string of Labor Party deficits, has executed a 180-degree flip, opting for economic stimulus and delaying balancing the books until 2020.
After tabling a harsh austerity budget in 2014, Mr. Abbott's Liberal-National Coalition government reversed course in May with a stimulus budget that forecasts a deficit of $35-billion (Australian), the equivalent of $33.4-billion (Canadian), for the current fiscal year. That's double the deficit Mr. Abbott's government had projected for this year in its previous budget.
This year's deficit amounts to 2.1 per cent of Australia's gross domestic product, and includes small-business tax cuts and child-care subsidies to move more people into the work force.
Sticking to the old budget plan would have made a bad economic situation worse. A 50-per-cent drop in the price of iron ore, Australia's main export, depressed tax revenues. Running a bigger deficit was the pragmatic option. It is also turning out to have been a wise political move.
Ottawa is likely to experience a similar fiscal whack, as a prolonged oil slump and a weaker economy (compared with what Finance Minister Joe Oliver predicted in his April budget) eat into federal tax receipts. But Mr. Harper's government has so staked its political brand on balancing the budget this year that it refuses to waver from that pledge, at least before the fall election.
The best that can be said about Ottawa's fiscal stance right now is that it is neutral, neither dragging down nor stimulating economic growth. That will change if Mr. Oliver resorts to additional spending cuts this year just to balance the budget. But even without further cuts, Mr. Oliver is still relying too much on monetary policy to keep the economic wheels turning.
It's hard to see what this week's interest rate cut by the Bank of Canada will accomplish, other than to further inflate a housing bubble and sink the loonie, in the hope that an even lower dollar will solve what Governor Stephen Poloz calls the "puzzle" of sluggish non-resource exports. It could create as many problems down the road as it attempts to mediate now.
The biggest drag on the Canadian economy right now is declining business investment. And a lower dollar typically discourages companies from investing in equipment and technology, most of which is imported. The cumulative impact of a weak loonie on productivity is what left Canada's manufacturers ill-equipped to face the competition when the dollar rose to parity.
Unlike the provinces, particularly debt-strapped Ontario and Quebec, Ottawa has plenty of fiscal room to pick up where monetary policy hits its limits. Sound fiscal management is not incompatible with stimulus spending. Mr. Harper, albeit then in a minority government, correctly responded to the previous recession with a $63-billion stimulus plan followed by mild restraint.
If the Harperites were smart, they'd be bragging about how that restraint has given them the leeway to inject extra spending into the economy now. Instead, they've become prisoners of their own rhetoric and risk paying the price at the polls if growth continues to falter.
Ottawa's enhanced child-care benefit, which will see parents receive retroactive benefits (totalling $3-billion) starting next week, turns out to be a happy economic coincidence. To the extent parents spend that cheque, rather than save it or pay down debt, it will provide a modest boost to the economy. As will federally funded infrastructure projects in the building phase.
But Mr. Harper could do much more if he was willing to admit that balancing the budget, while a worthy goal, would be procyclical (that is, weigh down an already sluggish economy) right now. His political doppelganger, Mr. Abbott, made that admission and may just have saved his political bacon.