Tuesday, October 02, 2007

LiberalTory Surplus Story

So the Throne Speech will be a Budget Speech. The new-con men; Harper's Neo-Con Government are preparing for a confidence vote. The only way they can bring themselves down.

Fresh from closing the books on last year's massive $13.8 billion surplus - about four billion more than it had recently predicted - the department said Friday that already in the first four months of this year it was operating on a $7.8 billion surplus, about one billion more than last year's monster haul for the same period.

Despite announced spending increases in the March federal budget, fiscal analysts have been watching with mild surprise as the surplus built up in government coffers month by month since April.

The new surplus was accumulating even though program spending rose by $3.7 billion during the first third of the year on higher transfer payments and increased expenses for such things as the war in Afghanistan.

But budgetary revenues also rose significantly by $4.9 billion, spurred on by higher tax receipts from corporations and individuals.

And July saw another $1.4 billion added as money continued to flow into Ottawa faster than the government can spend it.

"Wow," reacted John Williamson of the Canadian Taxpayers Federation. "This is feeling little like the atmosphere we had prior to the Liberals rolling out their five-year tax cut plan that began in 2000.

The calls for broad-based tax relief, particularly from the corporate sector, grew louder yesterday as the federal government disclosed its surplus for the first four months of the current budget year, at $7.8-billion, is on pace to become the largest federal windfall in the country's history.

The total is nearly three times what it projected for 2007-08 and more than halfway to the $14.2-billion windfall recorded for 2006-07, which the government unveiled this week.

Assuming spending and the rate of tax revenue growth remain as they are, the surplus is headed toward $23-billion -- which would make it the highest on record, surpassing the $19.9-billion set in 2000-01.

"All the stars are aligning for the federal government to unleash some stimulus -- if not in next year's budget, then before," said Douglas Porter, deputy chief economist at BMO Capital Markets.

"The confluence of events we have here is that there is pressure on the economy from the currency and the credit crunch; we have surplus numbers well above last year's lofty levels; and we have an election possibly looming."

He said the scenario was reminiscent of the fall of 2000, when the former Liberal government unveiled a $100-billion tax-cut package in an early mini-budget. Weeks later, an election was called, and the Liberals secured a third consecutive majority government.

For the four-month period ended July 31, the $7.8-billion surplus represents an increase of 15%, or just over $1-billion, compared with the same time last year. Corporate tax revenue climbed 25%, while revenue from personal taxes gained 3.5%, to $37.7-billion. On the whole, revenue for Ottawa increased 6.5%, to $80.5-billion.

The stars are aligning for Harper with a few clouds gathering. A budget speech means the government can fall, bets are increasing for a fall/winter election. Place your wagers now.

Harper pledges $725-million in tax cut

Harper's team gears up for election

Liberals ready for election, adviser says

And Harper uses his executive authority to pay down the countries debt, Alberta style, despite previously calling for parliamentary oversight. But then he was leader of the opposition and had to say that. Yeah right. $14 billion gets ya less than a billion in tax cuts. Peanuts.

The national debt now stands at $467 billion.

And speaking of peanuts,this surplus, shows that $1 billion in program cuts made last year, and those now pending in the Department of Environment, were not needed. They were purely for partisan political purposes.

With all the ceremony of an election stump speech, Prime Minister Stephen Harper announced Thursday that a $13.8-billion surplus - one which exceeded the federal government's own projections - has gone towards paying down the debt.

The move is an interesting role reversal for Harper, considering how loudly the Conservatives used to crow from the opposition benches when the previous Liberal government delivered massive surplus after massive surplus.

But when asked about the difference, Harper replied like a man headed to the polls: Liberals tax to spend, while Conservatives tax to put the fiscal house in order.

Despite that stance, echoed by Finance Minister Jim Flaherty as he fielded questions following Harper's quick exit, critics weren't impressed.

NDP Leader Jack Layton this week questioned the wisdom of using the surplus to pay down the national debt, suggesting that the government's failure to adequately fund social programs and infrastructure while swimming in dough makes it less likely his party would prop up the minority government.

Liberal finance critic John McCallum said the party's position on surpluses would be made clear when it releases its election platform, but noted that in the past Liberals have favoured a splitting the "surprise" windfalls between tax cuts, new spending and debt repayment.

"The lessons I draw from this is that there was certainly no need to raise the income tax rate and no need to cut the most vulnerable people, like women's groups, literacy programs and museums," he added. In the first Flaherty budget, the Conservatives reversed former Prime Minister Paul Martin's half-point reduction in the lowest income tax bracket in order to pay for a cut to the GST tax.

Paying down the debt Alberta style, meant that while Ralph Klein could symbolically burn the provincial mortgage, declaring Alberta debt free, the province was a mess.

Ralph Klein says provincial debt is dead.

On July 13, 2004, Premier Ralph Klein announced that Alberta was the only debt-free province in Canada. It had owed $23 billion when he took office in 1992

In order to pay down the debt it deferred much needed infrastructure funding, had unfunded pension liabilities, contracted out services and cut staff. Now in order to play catch up by funding infrastructure and services, and paying off pension liabilities, the costs are skyrocketing in an overheated economy. Causing the current treasurer to cry gloom and doom, hinting at future debt and deficits.

Paying down the debt is an illusion, it sounds good but it is unsound economics.

Like cuts to the GST rather than its elimination.

At least one neo-con press pundit, from Calgary of course, has claimed that Harpers good fortune economically has less to do with the belt tightening cuts made by then Finance Minister Paul Martin, than to the long term wisdom of Brian Mulroney.

No seriously, the man who left Canada in a debt and deficit crisis should be thanked for introducing NAFTA which she says is now paying off. Sure in sales of Canadian iconic industries to foreign capital and our link to the declining credit market.

Actually paying down the debt was Federal Liberal policy, and the debt reduction act was adopted under PM Paul Martin, one which was modeled on Ralph's. The Harpocrites are merely following through, well actually pushing through debt reduction as a priority. It is after all a policy of theirs since they were the Reform Party,created in those halcyon days of the debt and deficit bugaboo.

Meanwhile the rising dollar has offset the immediate impact that the credit market meltdown has had. And the surplus gives the illusion all is well in the marketplace.

One fly in the ointment is that the Canadian economy has yet to feel the full brunt of a credit crisis, which first surfaced in August and could result in fewer revenues for the government. But few expect that a mild economic downturn will do more than slow down the flow of cash from taxpayers.

But the inevitable storm clouds are gathering, despite the voluntary efforts of another Tory right winger; Purdy Crawford point man for Canada's big banks and credit unions.And despite viewing the melt down with rosy glasses for the past two months, David Dodge, finally had to bite the bullet Friday.

The Bank of Canada injected almost $1-billion into money markets yesterday, a stark reminder that all is not right in Canada's credit market.

Just two days after Bank of Canada Governor David Dodge declared that "the overnight market is now well on its way back to normal operations in Canada," the bank found itself having to defend its key interest rate with one of its largest cash injections to date.

The central bank also increased the amount that it leaves in its settlement system to allow for easy money transfers between banks. It has set aside $300-million, instead of the $150-million target of the past few weeks, and the $25-million during normal market conditions.

Something is definitely amiss in Canada's money markets.

The Bank of Canada, for the third business day in a row, injected about $1-billion into the overnight market to defend its key interest rate.

A bank spokesman said the liquidity provision was simply a technical move, a normal quarter-end demand for more cash.

But for the Bank of Canada's monetary policy to work properly, it's not enough to just defend the overnight rate. That rate needs to act as a benchmark for the short-term borrowing rates that corporations, home buyers and consumers pay.

That bail out was announced the same day that the second budget surplus was declared. And since paying down the debt results not in any real economic savings for Canadians simply a better credit rating, it is ironic that it could be wiped out in a credit market melt down.

But the Canadian economy is facing difficulties other than the strong loonie and the risk of a protracted U.S. slowdown, Mr. Hall said.

New elements in play have led the Bank of Canada to adopt a neutral approach to interest rates, Mr. Hall said. Those factors include the implicit tightening as a result of the widening of credit spreads and a reduction of liquidity as banks reverse a process in which they could push loans off their books by securitization. "It will take time for these effects to be felt," Mr. Hall said.

The freeze-up in the Canadian asset-backed commercial paper markets along with the rise in the Canadian dollar will make this Friday's release of the Bank of Canada's quarterly business outlook survey an important report, said David Wolf, economist and strategist for Merrill Lynch Canada Inc.

Government can only effectively pay down the debt when they have the secure asset base to do it. That is your infrastructure is paid for.

Instead of paying down the debt, the government needs to expand investment in its assets, not selling them off. Infrastructure needs investment which the Harpocrites deny since it runs counter to their neo-con monetarist policy.

Debt reduction only works if you have no liabilities, such as infrastructure. And to show exactly how hidebound the government is, they would rather have parliament literally fall down around their ears than abandon their neo-con ideology.

“Paying down the debt” means “reducing the public’s supply of T-bonds.” In other words, it means “reducing the public’s net financial wealth”

When the public’s T-bond supply gets too low, it puts a damper on the money creation process. And, as we saw in article 1 of this series, when new money is not created at a sufficient pace (or worse, when the money supply contracts), it results in economic stagnation or contraction. To me, that goes a long way to explaining our dubious history of paying down the debt.

As we reviewed in article 1, inflation is caused by too much money deflation is caused by too little money. But T-bonds are not money, they are merely “proto-money.” Because of that, and because it takes money to create inflation, it follows that increasing the public’s T-bond supply does not cause inflation. Let me say that another way: Deficits do not cause inflation, because deficit spending is the process of increasing the T-bond supply, not the money supply. Monetary policy causes inflation or deflation; fiscal policy does not.

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