Duelling deficits

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Former Prime Minister Paul Martin (POSTMEDIA )

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Federal Finance Minister Jim Flaherty (CP)

OTTAWA -- Six years ago the world was Canada's oyster.

Fiscal prudence at home and global economic growth combined to make budget day one of promise and fortune, where the only questions to be answered were how big the surplus would be and where all the new money would be spent.

"Mr. Speaker, the budget is balanced," Finance Minister Jim Flaherty crowed to the House of Commons on budget day in 2008.

They are words he hasn't uttered since.

Within 12 months from that 2008 pronouncement, the global economy had tanked, and the rosy times along with it. The predicted 2008 surplus disappeared and Canada ran its first deficit in more than a decade. In 2009, Flaherty injected billions into the budget to stimulate the economy. New tax cuts and construction and infrastructure spending led to one of the most prolific government ribbon-cutting years ever.

But it would get better, he said.

There would be a big deficit in 2009 -- $33.7 billion -- but by this year, he was supposed to be running black ink again, with a $700 million surplus.

Another year, another downturn in his expectations. Instead of $33.7 billion, the deficit for 2009 ballooned to $53.8 billion. Instead of balancing the budget in 2013-14, we would now run deficits until at least 2014-15. Now that next surplus isn't going to happen until at least 2015-16.

Instead of crowing about surpluses and giving money back to Canadians, Flaherty was left to defend Canada's finances by comparing them to the much-worse situations in the United States, Europe and Asia.

The deficit might be big, the budget documents said, but as a share of GDP, it wasn't as bad as in past recessions.

And the red ink kept flowing.

In 2012, Flaherty took out the scissors.

But Flaherty's plan -- banking on economic growth and holding the line on Ottawa's own direct spending -- was far different than how his predecessor operated.

And that's just what Flaherty wanted.

"Let me be very clear about what else this government has not done and will not do," Flaherty told the House of Commons during his budget speech Thursday. "We will not reduce transfers, transfers to individuals, children and seniors, transfers to provinces and territories for critical services like health care and education."

Flaherty never actually cut spending. Fiscal transfers to the provinces have continued to grow. Direct government spending -- the money Ottawa spends itself rather than gives to the provinces -- has held firm, or even gone down a bit, which has helped keep spending from soaring in the last three years but hasn't eliminated the deficit.

Between 1994 and 1997, Liberal finance minister Paul Martin slashed program spending by $15 billion. Transfers to the provinces for health care and other social programs were cut more than $4 billion in just three years.

Provinces were left scrambling.

Thomas Courchene, senior scholar at the Institute for Research on Public Policy, said Martin's big gamble paid off. The budget, which hadn't been balanced in almost three decades, went from a $42-billion deficit in 1993-94 to a $3.5-billion surplus in 1997-98. It led to 10 years of surpluses,

But Martin had help, Courchene noted.

"The external environment turned out to be very rosy," he said.

From the tech boom in the United States to demands from Asia and dropping interest rates, "our exports were booming."

"A growing economy pulled (Martin) out (of deficit) in one heck of a hurry," said Courchene.

Flaherty, meanwhile, had a few years of strong growth before getting hit by what he now refers to as the greatest economic downturn since the Great Depression. His hope that economic growth will lead to a return to surplus meant his deficit projections over the last few years have fallen far from the mark, as global economics continue to stay flat and fragile.

"We're ready to take off if only the world would grow a bit," said Courchene.

Gregory Thomas, federal director of the Canadian Taxpayers Federation, said despite the global economy, Flaherty should take lessons from Martin.

"We line up on the Paul Martin was better (than Flaherty) side," said Thomas.

"Paul Martin paid off over $100 billion in national debt and left Canada in an excellent position when we (hit the recession)," said Thomas. "The 1995 budget was controversial but it got the job done."

He said Martin and prime minister Jean Chrétien had a horrible hand dealt to them when they took office -- high interest rates and a huge deficit. They were able to turn that around with discipline and hard choices.

Flaherty was handed a government with low interest rates and a big surplus and spending has been going up ever since.

"We would have preferred in the first year of a majority government they would have balanced the budget immediately," said Thomas.

He said Flaherty could have balanced the budget "in his own backyard" by ending pork barrel funding of regional economic development groups, forgoing politically motivated handouts and getting tough on the civil service. Thomas said, for example, the average civil servant takes 18 days a year off on top of their vacation, 2.5 times more than the average in the private sector.

"How can you take a government seriously that tolerates that kind of thing?" said Thomas.

mia.rabson@freepress.mb.ca

Republished from the Winnipeg Free Press print edition March 23, 2013 A4