Friday, September 30, 2005

Deficit Hysteria Redux

As I predicted in my article on the $152 billion in tax cuts, the nasty Deficit hystria is back. It is the political equivalent of Chicken Little's 'The Sky is Falling'.

Nobody in the the capitalist ruling classes and their political parties, the Liberals and Tory's, worried about deficits until last spring when the NDP talked about increasing social spending by a pitiful $4 billion.

The red herring of a deficit was raised by Monte Solberg, Tory Finance critic, in an attempt to whip up a bit of good old right wing hysteria over social spending. Never does he mention deficits when his corporate masters get their tax cuts. And his corporate masters were at it again yesterday also bemoaning the possible deficit that could be created by public spending, but never with increased tax cuts to them

Business leaders issue spending warning
Top business leaders warned yesterday that the approaching federal budget must rein in "runaway growth" in spending and cut corporate taxes, or risk undermining Canada's fiscal and economic health. The Canadian Council of Chief Executives told a parliamentary committee's prebudget hearings that any repeat of last year's massive program spending hikes may jeopardize competitiveness. The council represents CEOs from 150 leading corporations with combined annual revenue of more than $600-billion "Program spending last year grew by more than 15 per cent. That was roughly eight times the rate of inflation, and more than three times faster than nominal economic growth," David Stewart-Patterson, executive vice-president of the Canadian Council of Chief Executives, told MPs. "Such a pace simply cannot be sustained unless the government plans either to hit Canadians with higher taxes or to break its promise to stay out of deficit," he said. "No sensible economic strategy can be based solely on ramping up public spending."

No then gee what strategy would they suggest....wait for it......

The council said the time is ripe for corporate tax cuts to recharge Canada's competitiveness, which is hurting from weak growth in productivity and foreign direct investment. "Over the past two fiscal years, federal revenue from corporate income tax has grown $7.7-billion or 35 per cent," Mr. Stewart-Patterson said. "Corporate income tax now brings in more cash than the [goods and services tax]."

Ah too bad, they should be paying more in taxes, after all their surplus value is produced by workers not tax cuts or investments. And the Gouge and Screw Tax is a regressive tax on the poor. Are they suggesting that the poor pay more in taxes than wealthy corporations and their bosses? Of course they are. Even if its a myth that tax cuts improve manufacutring and production output. They don't see chart below.

Now in order to avoid more deficit hysteria the Liberals are planning to introduce No-deficit budget legislation. Another dumb idea whose time has passed. Don't believe little old left winger me, take it from those in the know:

"However, Don Drummond, chief economist at TD Bank Financial Group, said a guarantee against deficits was "horrifically bad policy. This is entirely political. We have created an 11th principle 'thou shalt never go into deficit' but the impact of a $1- or $2-billion deficit in an economy our size would be irrelevant. The whole thing seems bizarre."

Yep whats a few billion in deficit, its NOT debt after all and as Alberta showed in 1995 one year after having a deficit it was abounding again in surpluses and has done so ever since. Now of course back then, a decade ago everyone was suffering deficit hysteria including economists at the TD Bank, my what a difference a decade makes.So how come Don Drummond is not on the same page as his bosses, in the Canadian Council of Chief Executives? Hmm can you say special interest group. And almost word for word Monte repeated what this special interest group of the well heeled said;

The dramatic rise in government spending in the last fiscal year has led to accusations by Conservatives that the budget surplus is being squandered and that the economy could slide back into deficit if growth slows. "We support measures to make sure we don't go into deficit, but the government is missing the point. We want to ensure that surpluses are put to some end -- services that make a difference in people's lives, or a reduction in taxes that hurt productivity, or debt repayment," said Monte Solberg, the Conservative finance critic. "Much of the spending does not produce results."

Well the NDP better balanced budget did apply "spending on services that make a difference in peoples lives", but Monte and his Tory pals opposed it. You see their real agenda, is no spending is good spending, everything should be corporate tax cuts. Except that tax cuts to corporations does NOT put money back into production and manufacturing, it goes into general revenues to offset profit losses. Don't beleive little old left winger me? Well the Economist says so:

The chart below shows that in 1995, countries with big budget deficits did generally pay a penalty in higher real long-term interest rates. Today, however, as the right-hand chart shows, there is no correlation at all between borrowing and real interest rates. Similarly, a study by the OECD in 1995 found that countries with big current-account deficits over the previous decade tended to have higher real bond yields. An update of that analysis by The Economist shows that this relationship has broken down, too. Financial markets seem to be doing a poor job as economic watchdogs: in particular, America's profligacy is being subsidised rather than punished.

Some convergence in real bond yields is a natural consequence of a global capital market. In a closed economy, if a government increases its budget deficit it must pay higher interest rates to persuade domestic investors to hold more bonds. But if it can tap global savings, it can borrow more cheaply because a smaller rise in rates is needed to attract the required funds. Even so, a more efficient international capital market is supposed to ensure that capital is allocated to the most productive use. Yet much of the recent inflow of foreign money into America is not financing productive investment, but a housing bubble and a consumer binge.One explanation is that, with interest rates low pretty much everywhere, investors are hungry for any sort of yield. This has made them more willing to buy high-yield bonds, and has pushed down the spread that riskier borrowers must pay compared with safer borrowers. This not only encourages investors to price risk too low; it may also produce bigger economic imbalances.

See my How do you spell economic basket case? USA

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