Cutting back to prosperity
One of the most surefire ways to start a long argument is to put economists in a room, ask a question and tell them they can’t come out until they all agree on the answer.
Prime Minister Stephen Harper is asking the question publicly: what’s the best way to grow the economy?
Prepare for fireworks.
Viewed against the growing chaos in Europe, the stagnation of the United States and the potential for a slowdown in China, you can see where Harper has picked sides — he’s battening down the hatches.
In his address at the Davos conference in Europe last week, and in media releases since, Canadians are being told to expect dramatic moves soon. Cuts to government staffing could exceed 10 per cent. We are also to expect a change to the Old Age Security program and a “super-pool” retirement plan to accommodate the majority of Canadians who don’t have a workplace pension plan.
Let’s deal with the last item first, because it’s the easiest to visualize. Expect the government to mandate that small businesses and the self-employed make payroll deductions to buy units of this pool, which will build to supplement personal savings and CPP in retirement.
It makes sense on the surface, but expect small business to complain that it drives up labour costs.
One group of economists argues that taking money out of the hands of business and workers kills consumer demand, which kills jobs, which further kills demand, creating a downward spiral.
Let’s apply that thought to the notion of huge cuts to government itself.
Canadians are being primed to hear the finance minister announce a plan to balance the federal budget two or so years ahead of schedule, in large part with a 10 per cent cut in staffing costs. You can almost hear taxpayers cheering already.
But what happens when a billion dollars of payroll is taken out of the economy? Especially when there is no corresponding billion dollars of savings to be spent elsewhere? Remember, that money is simply reflected as a reduced deficit, whose benefit will not be felt until much farther down the road. There’s no actual cash involved.
Once again, the same principle applies to reductions in any benefit program of the federal government. Meaning, OAS, in this instance.
The plan being floated is that sometime down the road, seniors will not be able to apply for OAS benefits (which are paid above their Canada Pension Plan payments) until age 67, instead of 65. Other rules may change as well.
Government officials are pointing to a tripling of OAS costs as the years go by, as Canada accumulates a few million more seniors. OAS payments are just over one per cent of GDP now, we are told, so decide for yourself if tripling that is significant.
It might be more significant if real GDP falls due to massive layoffs in the civil service, reduced hiring by small business and reduced spending by the self-employed.
Can Canadian taxpayers really fill that gap by increasing their own spending? One expects not.
There is supposed to be a massive mountain of cash held in corporate bank accounts, waiting to be invested when “the time is right.” Is a time of reduced consumer demand and higher unemployment the right time? It would be nice if it were, but corporations don’t make spending decisions based on our wishes.
Seniors groups are already at battle stations over OAS changes. But smart advice to younger workers is to not expect OAS to be there for them 20 years from now. They’re better off paying off their debts as fast as possible and building savings. By not buying stuff, thus reducing demand and killing job growth. . .
Massive service cuts are already occurring in the U.S. How’s that going, so far? About as well as their massive prison-building program went?
Somewhere between death-by-cuts and death-by-debt, Canada needs to find a middle path.
Greg Neiman is an Advocate editor.
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