What Paul Martin should do

October 5, 2001

Paul Martin and his Liberal colleagues are handicapped by their anti-deficit phobia in dealing with the current economic downturn. A surplus come-hell-or-high-water approach makes sense in a period of economic expansion, but in the current recession (Yes, we really are going into one!), it is unwise to say the least. Such rigidity, uncharacteristic for the party of pragmatism, is reminiscent of the balanced budget religion practiced so disastrously by the Bennett government during the 1930s.

Forecasters, for the most part, are predicting a mild recession with recovery starting next spring, but the truth is they don't really know. The possible fallout from heightened geopolitical instability including the disruption of oil supplies and the fallout from deepening worker insecurity and its flip side, consumer confidence, suggest that the recession could be much deeper than is being forecast.

South of the border, deficit phobia and recession denial have given way to bold action. The Bush government's fiscal stimulus package could reach $200 billion in Canadian dollars. This is on top of the Federal Reserve's massive monetary stimulus. These measures will undoubtedly help our own highly dependent economy, but they are not nearly enough.

When the U.S. goes into recession, so too does Canada, and here the recession is almost always deeper and longer. The federal government's role is clear in times like these--to help moderate the recession and to protect the people hardest hit.

Some in the government are saying, let's wait to see how bad it gets before we do anything. But failure to act now could make things much worse than need be, and make the resulting economic and social damage much harder to repair.

What should Paul Martin do?

On the monetary side, the Bank of Canada should continue--in fact accelerate--its interest rate cuts. But this alone is not enough. As real interest rates get closer to zero, their ability to stimulate investment weakens. At some point businesses won't invest, no matter how cheap the cost of borrowing, unless they think there will be sufficient demand for their products. Thus, with consumer confidence and exports plunging, fiscal stimulus becomes critical.

The finance minister should put his planned tax cuts for the coming fiscal year (about $17 billion) on hold. He should plan to spend every last penny of this year's surplus, currently estimated at $9 billion (no more hiding the surplus), and he should be prepared to run a deficit if necessary. Five years of surpluses including last year's $17 billion has given Mr. Martin sufficient room to maneuver in times of economic emergency--namely, now.

Any tax relief stimulus should go to low and middle class families to maximize its effect. Accelerating the phase-in of the child tax benefit would be a good first step.

Mr. Martin will no doubt spend more on airport and border security, on military intelligence and other measures to protect Canadians against possible future terrorist attacks. But he could do more. Our civil service has been so downsized that it can't properly enforce Canada's immigration and refugee, health and safety, environmental, and other laws and regulations. He should implement a broad initiative to restore the capacity of our public service.

Mr. Martin should also implement a series of measures to enhance worker security. After the last recession the Chretien government made massive cuts to the social safety net. The unemployment insurance net, for example, is so badly ripped that only one-third of unemployed workers now collect insurance, down from three-quarters in 1990. The $36 billion surplus in the UI fund was designed to be drawn down precisely in times like these. Mr. Martin must broaden the rules to protect workers--especially the most vulnerable temporary and part-time ones. A stronger social safety net will mean greater consumer confidence and keep more purchasing power flowing into the economy.

Finally, he should bring in an enhanced national public investment program targeted to three areas: urban renewal, housing, and environmental infrastructure. All three areas are vital to our economic and social health. In all three areas the need for public investment is great. And in all three areas, powerfully beneficial economic and job-creating effects will result in the short term---much more so than even the most stimulative tax cut.

Hopefully, the government will exchange its current do-nothing-and-hope-for-the-best approach for a reality check of our current plight and bold measures to address it. Otherwise, get set for a roller coaster ride in the months ahead.

Bruce Campbell is Executive Directcor of the Canadian Centre for Policy Alternatives.