How Canada can beat tough times

'In tough times it is important that our governments show leadership and make smart policy choices that are in our long term interests,' say James Clancy and Peter Olfert. 

(Jan 22, 2009) - As Canada’s parliamentarians gather next week to debate the federal budget and how to tackle the economic crisis, it is important that intelligent policy decisions be taken to carry us through tough times while protecting past gains and ensuring a better future. A national public services investment plan funded by bond initiatives and coordinated between levels of government is what the First Ministers should be working to achieve.

Quality of life matters a lot to Canadians. In tough economic times it’s important for our leaders to talk and reflect about how our quality of life can be maintained and improved.  The contribution public services make to our quality of life and economic prosperity should be obvious but it is not always properly appreciated.

It is generally agreed that public services such as health care, education and social services need to be properly funded and universally available. It should be better known that public employees are concerned that public money be spent carefully. Public employees work to protect against waste and to improve the quality of care and attention given to the needs of our fellow Canadians.

Tough times have arrived in Canada and most economists expect the situation to get a lot worse before it gets better. We’re in the midst of a financial perfect storm of a sputtering US economy, tumbling commodity prices and falling domestic demand that will conspire to hurt the country's growth prospects for the next few years.

A starting point

Lots of people, including our First Ministers, talk about economic problems, but they do not usually agree about what to do next. The reason is understandable. Different interests are in conflict. We should not be surprised when this produces different views of what is best.

Despite the raised voices we can find a starting point. The Canadian economy picks up and slows with changes in spending. You might say spending is the economic motor. When the economy declines it is because spending is slowing. The spenders are governments, businesses, individuals and their families, and foreign buyers of Canadian products and services.

It is important for Canada’s First Ministers to carefully consider the situation we face and then take decisive and coordinated action. So what should Canada’s First Ministers do? As we see it, there are four options. 

We can wait for the rest of the world to bail us out, for new spending to flow in from abroad. But Canada’s economy is vulnerable to the world slowdown triggered by the US subprime mortgage debacle. President Obama has said the US economy will continue to decline at a rapid clip and the recovery will take years, not months. 

We can wait for businesses to increase spending and investments. But, despite making a lot of money in Canada in recent years, businesses only spend money when they expect to make profits, not when they have already made profits.

Business won't help

Few economists expect business spending to continue in the current climate. A sharp reduction in credit means businesses can’t borrow to finance new investments. We’ve already seen substantial private sector job losses and how deep Canada’s overall job losses go is still unclear because so much depends on the speed of the recovery in the US.

We can wait for consumers to start to borrow and spend again. But individuals and their families are strapped. Household debt is at an all-time high. Wages are stagnant for the vast majority of workers – if they still have a job. If workers are fearful for their jobs they are more likely to save rather than spend. 

Finally, we can ask governments to borrow and invest in our future. Looking at the options, investing in public services makes the most sense at this time. The federal government today has greater fiscal room to stimulate the economy than virtually every other developed nation. 

The capacity to act now

Thirteen years of fiscal surpluses and strong growth have reduced the debt-to-GDP ratio by more than half — from 68.4% in 1995–96 to 29.8% in 2007–08. Federal debt as a share of the economy is now equivalent to the level it was in 1965–66. The federal government has plenty of fiscal room to increase transfers to the provinces for vital public services and social programs.  

Informetrica Limited has calculated $1 billion of personal tax cuts increases GDP by $720 million and creates 7,000 jobs. The same $1 billion spent on health care-related services boosts GDP by $1.78 billion and creates 18,000 jobs. Transfers to low-income Canadians have a bigger multiplier effect than generalized tax cuts, a point made recently by the IMF. Investing $1 billion to boost the incomes of the poor would boost GDP by almost $900 million and create 7,000 jobs.

Federal and provincial governments have an opportunity to provide Canadians with safe, secure returns on financial instruments (government bonds) which pay competitive rates with no service charges. With financial markets in disarray, Canadians need new sound financial instruments for their savings. Government bonds provide the highest degree of safety and they do not charge management expense fees.  

With a new tax free savings account available to Canadians, it makes sense for citizens to buy government bonds to place in the accounts. Investors in government bonds are putting their money to work in providing critical services. Governments could clearly label their bonds (education bonds, health bonds or green bonds) giving citizens a choice as to where they direct their support.

Time for leadership

In tough times it is important that our governments show leadership and make smart policy choices that are in our long term interests. Savings mobilized by government bonds can be redirected into increased funding for public services that will support vulnerable families, improve our quality of life and revive our economy.

James Clancy is the president of the 340,000-member National Union of Public and General Employees (NUPGE).  

Peter Olfert is the president of the 32,000-member Manitoba Government and General Employees’ Union (MGEU/NUPGE).