Tag Archives: budget

Canada’s Strange New Budget Legislation (Revised)

Thesis: A government outlawing deficit spending is overly idealistic and restricts lawmakers by making fiscal stimulus overcomplicated.

Tomorrow, April 21, Canadian Finance Minister will deliver his budget proposal, including an unprecedented piece of legislation that would outlaw government budget deficits, per the Wall Street Journal.  The bill includes a necessary loophole clause that would make exceptions for recessions or extraordinary circumstances such as wartime or a natural disaster.  It’s a proposal that seems to be addressing a problem where one doesn’t exist – Canada has historically run a fairly responsible budget, with a very modest ~35% net debt to GDP ratio.  And as one of the most politically and economically stable countries in the world, it doesn’t cost Canada much at all to borrow.

Basic countercyclical policy dictates that governments should spend during economic downturns in order to prop up aggregate demand, financing itself by issuing debt, which it then pays off during economic booms.  This law tries to make this behavior a mandate by forcing the government to cut spending during good time.  It’s a nice idea in theory, but it may make the use of fiscal policy to stimulate recessions a bit tricky.  Specifically, a problem arises when the government tries to define where a recession actually ends – cutting a stimulus package the moment a quarter shows a positive growth rate (however small) is rarely ideal.  In fact, we only have to look back a few years to demonstrate this in practice.  Canada’s stimulus package for the recent global recession was introduced in 2009 and continued throughout 2011, according to The Star, even though the Canadian economy showed positive growth rates as early as mid-2009.  By allowing stimulus to continue past the point where a recession technically stops, the government can ensure that the spending has boosted the economy throughout the entirety of the country, since growth rates in some outlier areas may skew the aggregate growth rate positive even when other parts of the country are still hurting.  It also gives consumers a solid timeline to base their expectations on – if households know that the fiscal stimulus could be cut off at any time, they may be more reluctant to go out and spend.

What the Canadian Finance Minister is proposing would force stimulus packages to be reluctantly designed in small, short-term packages, which may require the government to respond to a recession multiple times, dragging out its length.  What’s more, the increased scrutiny on deficit spending might make lawmakers reluctant to even consider introducing stimulus proposals.  And since the spending would have to be so short-term (and maybe even cut off if the economy recovers prematurely), the government can’t commit funds to longer infrastructure projects – a major component of many federal stimulus packages.  There’s no good reason for the Canadian government to restrict itself like this besides political grandstanding.  A more prudent step towards managing federal debt would be to expand the budgeting process to require a balanced budget over the course of a business cycle.

Infrastructure Investments: The Road to China’s Future of Growth

In light of today’s budget announcement from the White House, I have decided to explore one of the main focuses of the $478 trillion spending plan that the President has come up with to revive the economy, infrastructure spending.

According to Mark Magnier’s article for the Wall Street Journal titled “Benefits of Infrastructure Spending Not So Clear-Cut, Economists Say,” “Washington-based Progressive Policy Institute concludes that every dollar spent on U.S. roads, bridges and public transport spurs $1.50 to $2 of growth.” According to research conducted by Oxford Economics for PWC’s study titled “Capital project and infrastructure spending Outlook to 2025,” “the Asia-Pacific market, driven by China’s growth, will represent nearly 60% of global infrastructure spending by 2025”

(www.pwc.com/cpi-outlook2025). The study also predicts that Western Europe infrastructure spending will not return to pre-crisis levels until 2018, as Asia’s has been growing this entire time.

“Developing economies, most notably China and other parts of Asia, account for nearly half of all infrastructure spending, up more than 10% from 2006” (www.pwc.com/cpi-outlook2025)

How will China’s success in the race for infrastructure growth will contribute to its economic growth compared to Europe’s?

While China’s economy had been growing in double digits over the last 20 years, growth has slowed recently. This growth is still at a respectable annual growth rate of 7%. China’s economy is maturing and beginning to lose its cost-competitive advantage to other lower cost countries. As this happens, China will need to make strategic investments to sustain its growth.  Investments in infrastructure can serve this growth need. Infrastructure investments immediately create jobs in construction and related industries. Infrastructure investments also provide opportunities for longer term, more sustainable growth and development.

China should continue to make SMART infrastructure investments, especially in high speed rail, ports and airports and wireless high-speed telecommunications to continue to open markets within China and to provide a better quality of life for its citizens.

Virginia Lau discusses Chinese high speed rail in her article “Record breaker: China’s incredible north-south high-speed train line plan” for CNN as the world’s longest high-speed rail line was just proposed to run from “Inner Mongolia’s Baotou city and running through southern Shaanxi, Hubei, Hunan, Guangxi and Guangdong, its final stop would be in Haikou city on Hainan Island, China’s southernmost province” (http://www.cnn.com/2015/01/08/travel/china-high-speed-north-south-rail/). Additionally, this project will connect rural provinces with urban areas such as Beijing. This will promote growth by providing sustainable job opportunities for those in rural areas, as discussed above.