Wednesday, December 3, 2008

Some thoughts on the coalition

In general the details of what the coalition will be doing as a government is very thin on the ground. It feels like they will be flying by the seat of their pants and this is a problem because there is very little unity between the partners on most issues and I can see huge NDP resistance to a lot of the normal Liberal governance positions. When Harper came into power in 2006 he a five clear and achieveable policy agenda points, this is a clear model for a minority government. The problem for Harper came when he managed to do everything within the first year.

The coalition will suffer from enacting a program that the public did not have a chance to vote for. In many ways, a coalition government is more like a caretaker government until there is an election.

Debt and Deficit

Nationally we are looking at a budget deficit in the next year no matter who is government because no one has the guts to make the cuts needed to balance the budget. The question is how serious will it be?

My estimate is that we are looking at at $5 to $10 billion dollar shortfall in a 'status quo' situation. With the Conservatives I believe this can be held to the lower end.

With the coalition there are plans for a lot more spending, estimates floating around of the number is about $30 billion. Given the time it takes for the federal government to do most things, my estimate is that most of this $30 billion will be spent after the 2009/10 budget year. For the next budget year I estimate the coalition will leave us with a shortfall of $20 billion in 2009/10, $25 billion in 2010/11 and $10 billion in 2011/12. A total increase in national debt of $55 billion. I am assuming the coalition will take some actions to increase government revenues, more on that lower down.

This will more than a 10% increase in the national debt of Canada. This increase in debt has several significant problems for the country. First off it means we will have an extra $2.5 billion in debt charges for decades. We have been working hard to reduce the national debt and this has meant the money we spend to service the debt has been falling and allowing for more money for programs. Another problem is that if the government has to borrow $50 billion to operate, it has to get this money from the public. Taking $50 billion out of the capital markets in Canada to allow government to operate means less money for private purposes. The way this will play out is through higher interest rates for mortgages and business loans, something in the order of an extra $3 billion a year in borrowing costs.

How will the coalition deal with the budget shortfall? I can see several taxes that the coalition may introduce, incerase the GST and bring in the carbon tax.

Returning the GST to 7% could bring in about $12 billion in more revenues per year. Doing this is politically dangerous as there are few taxes people dislike more than the GST. Retailers will scream because it will dampen demand. It will also cause a sudden increase in inflation which has direct implications on the process of interest rates being set by the Bank of Canada.

The carbon tax does make fiscal sense if it is applied like has been done in BC. It has to be part of tax shifting so as to send signals to the market. The danger is if a carbon tax is enacted without being revenue neutral. I do not see the coalition going ahead with this because the BC NDP is opposed to a carbon tax and is headed into an election here where this will be a major issue.

There have been no other signals of higher taxes from Dion.

Afghanistan and relations with the US
Will the coalition take Canada out of Afghanistan? If they do, this will be a direct snub to the new American president and risks his goodwill around trade issues. Obama is keen on the way in Afghanistan and needs allies there. He is looking towards Canada as being a core partner.

At the same time there will be a push in the US to get Canada to make trade concessions. I can see a major assault on the automotive industry in Canada. Congress may require US companies to make more of their cars in the US if they get bail out money.

Canadian Wheat Board
The coalition is talking about support for the Canadian Wheat Board and supply management. This is going to be unpopular on the praries among most people, it will be seen as an intervention by an eastern government in the western economy. I am not sure why they would raise this issue, there is no political or economic advantage in doing so.

The Environment
I thought this was an issue near and dear to Dion, but it is almost completely missing from the program of the coalition. The only thing mentioned is a cap and trade emissions system.

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