The B word is setting on the Canadian horizon – and it’s not bailout.
In just days, the much-anticipated federal budget will be announced and the promised stimulus package will set the tone for how Canada will deal with the economic downturn. The best way to stimulate, how to spend and where to cut, is at the heart of discussions leading up to Jan. 27.
But, this is not the time to skimp on funding social supports and it is important to understand why.
The bleak economic outlook provides the government with an opportunity to invest in the social fiber of society. An effective stimulus package needs to fund programs that are central to the well-being of Canadians.
The Canadian Centre for Policy Alternatives laid out an alternative federal budget. "Simply put," the document states, “Government spending provides more stimulus than tax cuts, because it creates more jobs. People who have jobs spend. People who lose them do not.”
Co-authors Armine Yalnizyan, senior economist with the centre, and David Macdonald, coordinator of the Alternative Federal Budget Project, outline how they feel the government should use $33 billion – the equivalent of the two per cent of GDP major economic and global groups are recommending countries use to fuel the economy.
Investing in infrastructure, green projects, training and education and reconfiguring the availability of employment insurance are solutions that will impact struggling Canadians now and not cause detriment in the future.
Cutting taxes is a short-term solution. To ensure future surpluses the government needs to run a deficit now. But, too many tax cuts will affect the quality of social programs in the long-term.
It is only possible to draw water from a well for so long before it dries up. To cut taxes now, only to raise them in the future, would create a political dilemma.
An interview on the International Monetary Fund website said stimulus packages should focus on spending and targeted tax cuts.
“Thus, they [the government] should not put all their fiscal eggs in just one basket, and the right package probably includes a mix of different policies,” said Carlo Cotterelli, director of the IMF’s Fiscal Affairs Department.
Tax cuts are an automatic economic stimulator because money is put straight into the hands of consumers.
Cotterelli says tax cuts aimed at the most cash-strapped are likely to result in spending. But falling prices and instability in the market also mean people may choose to keep their money tucked under their mattress until they feel the economy has calmed down.
The IMF is encouraging government spending when it would not typically do so. The Fraser Institute, on the other hand, is pressing the government to reduce government spending and permanently cut taxes. “There’s no need for Canada to run a deficit other than a politically motivated desire to do so,” said Niels Veldhuis, Fraser Institute’s senior economist, in a news release.
Except that some Canadians are suffering.
Although not all Canadians have personally felt the effects of the recession, the government needs to ensure Canada does not spiral into a deeper slump.
The dawn of the budget will light Canada’s course on the economy – and the feasibility to maintain social programs in the future.