The 1998 Alternative Federal Budget - Conclusion


What Happened?

What Could Have Happened?

What Might Happen Now?



Canadian Centre for Policy Alternatives

CHO!CES: A Social Justice Coalition

by Jim StanfordEconomist, Canadian Auto Workers and Co-Chair, Macro Policy Committee, Alternative Federal Budget

Suite 804, 251 Laurier West, Ottawa, Ontario, K1P 5J6

Phone (613) 563-1341; fax (613) 233-1458; e-mail

The 1998 Alternative Federal Budget: Technical Paper #1

OVER THE RAINBOW: The Balanced Budget, How We Got It, And How to Hang Onto It

V. Conclusion

Dorothy: "Oh, will you help me? Can you help me?"

Glinda: "You don’t need to be helped any longer.

You’ve always had the power to go back to Kansas."

Canada’s business and political leaders are presently filled with pride at the apparent success of efforts to reduce the federal deficit through program spending cutbacks. The rapid improvement in federal finances since Finance Minister Paul Martin’s historic 1995 budget is proof, the argument goes, of the wisdom of the spending cutbacks. An upcoming fiscal dividend will be our reward for the difficult but wise measures Martin imposed.

Looking back on the sources of the rapid improvement in federal finances, however, suggests a very different story. The tough spending cuts were actually only a secondary factor in the federal government’s fiscal turnaround. More important was a favourable macroeconomic environment, marked by much lower interest rates and a consequent acceleration of economic growth. In this macroeconomic context, Martin’s original deficit-reduction targets could have been met even without the spending cuts.

What’s done is done, of course, and Canada’s difficult experience over the past two years cannot be rewritten. It is crucial, however, that our macroeconomic policy-makers examine more carefully the factors that created the present fiscal balance. The much-vaunted fiscal dividend will be dramatically and needlessly reduced if the Bank of Canada continues with its policy of cutting short our recent strong economic growth. And if this tightening should accidentally stall Canada’s recovery altogether (as occurred in 1995), then there won’t be a fiscal dividend. The present top priority placed on maintaining ultra-low rates of inflation needs to be reconsidered; the goal of low inflation needs to be balanced against other goals (including job-creation and the continued fiscal repair of our public sector). Otherwise, taxpayers and unemployed workers alike are going to pay a very high price indeed in the coming years for the preservation of Canada as the low-inflation promised land.

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