Month: October 2009

TD Bank's chief economist Don Drummond and his director of ecnomic analysis Derek Burleton take a look today at the books of federal and provincial governments [PDF] and, though they've been among the gloomiest of forecasters during this recession, their latest report, while grim, is not the most dire in the world. They conclude that, if federal and provincial governments want to get back in the black by fiscal 2016 — which they believe to be an ambitious target — it can be done but governments will have to slow growth in government spending to 2 per cent year. Of course, as they point out, no government in office has demonstrated anything close to that kind of discipline.

Jim Flaherty, despite the fact that he's a Conservative, has had to boost spending in the current fiscal year to fight the effects of recession, something which many small-c conservatives were upset about but which which found favour with most mainstream economists. Indeed, Flaherty was named international finance minister of the year by some European finance and economy mag (a magazine which no one in Canada had heard of until the Tories pointed us to it after Flaherty got their award. But I digress …)

But here's Flaherty's spending record since taking over as finance minister for the full fiscal year of 2006-2007.

Year

Transfers To Persons

Transfers to Other Levels of Govt

National Defence

Other

All Program Expenses

Debt Charges

All Expenses

2006–07	5.7%	4.2%	4.6%	11.5%	7.5%	0.5%	6.3%
2007–08	4.6%	8.6%	10.2%	4.6%	6.0%	-1.8%	4.8%
2008–09	5.9%	0.8%	8.3%	4.0%	4.2%	-7.0%	2.6%

AVERAGE

5.4%

4.5%

7.7%

6.7%

5.9%

-2.8%

4.6%

While Flaherty's spending on debt charges has been good (and the uncharitable will chalk those declines up to very favourable and historically unique low interest rates) the size of the federal government, measured by all program expenses has grown by nearly 6 per cent a year during his first three years. It will be up by about 14 per cent this year because of special stimulus spending.

But back to Drummond and Burleton — here are the key points they make in the report today:

• Deep recession and stimulus will propel the combined federal and provincial deficit to at least $90 billion in FY 09-10
• Relative to GDP, the overall deficit (6%) and debt (64%) will still fall short of the levels in the mid-1990s, when they hit 9% and 102%, respectively.
• However, governments are likely facing fewer degrees of freedom than 10-15 years ago. Trend revenue growth is likely to be slower and age-related spending pressures more intense.
• In order to return the aggregate budget balance to zero by FY 15-16, which is still fairly unambitious, we calculate that trend program spending growth would need to be held to 2%.
• A 2% target doesn’t seem dramatic, but trend annual outlays have been rising by 7% per year. Further, some areas (i.e., health and elderly benefits) are on track to grow much more rapidly, underscoring the risk of significant restraint elsewhere.
• History shows that across-the- board program slashing or large cuts without underlying structural reforms don’t work well.

Here are some other excerpts I've noted as I've read through it:

Keep in mind that many of the deficit estimates shown for FY 09-10 may ultimately be revised upward further. Most vulnerable to revisions are those jurisdictions that have not provided updated fiscal snapshots since their spring budgets in light of the unexpected severity of this year’s recession. In addition, year-end results for FY 08-09 have largely come in on the weak side of government expectations, pointing to a softer starting point into the current year. For these reasons, the combined federal-provincial deficit for FY 09-10 could ultimately hit $100 billion, or 7% of GDP, leading to a corresponding upward revision to the debt count.

…

… make no mistake. Restoring balance in the years ahead will be no small feat, especially in provinces where deficit-to-GDP ratios are running in excess of 2%. Other metrics also highlight the magnitude of the problem. Deficits as a share of own-source revenues provide an indication of the degree of over-spending vis-à-vis revenue capacity or under-taxation relative to spending. On this count, a number of provinces are running large deficits of more than 5% of total revenues. Moreover, deficits as a share of only those revenues at a province’s discretion (i.e., own-source revenues) are hovering as high as 10-25% in the Ontario and the Atlantic.

…

Over the next 5-10 years, real GDP growth appears set to expand by about 2% per year on a trend basis, rather than the historical rate of closer to 3%. Assuming that economy-wide prices rise at about 2% per year, trend growth in the tax base will be held to a modest 4% per year. [That said, and after doing some economist higgery-jiggery] a reasonable working assumption for governments’ annual revenue take is in the improved, but still moderate 5.5-6.0% range. Furthermore, no jurisdiction in Canada will be immune from these broader economic forces at play.

…

the challenge in containing spending growth to such a modest rate (effectively zero in real per-capita terms) will be a tall order. As debt rises and interest rates begin to pull off their lows, public debt service charges will increase. So growth in program spending would likely need to be set at a maximum of 2% per year in order to maintain total spending at 3% per year. Such a pace represents a far cry from the status-quo, where rates have been sustained at 6-7% per year at the federal and provincial levels. But as well, that’s an average rate across all programs. And with certain expenditures running well above this pace – notably those driven by aging trends – and others considered off limits, other areas will need to be reduced substantially.

…

The longer the deficit horizon, the greater the chance that plans can get derailed if shocks or nasty surprises emerge. There are also the prospects for a growing fiscal squeeze around the corner resulting from demographic pressures. With health care costs double for individuals over the age of 65 years compared to those under 65, and with an increasing share of Canadians collecting elderly benefits over the next decade, the premium on age-related expenditure growth will only rise further. At the same time, these expenditures will likely need to be funded through a slowing labour force and declining per-capita tax base. In order to prepare for the fiscal costs arising from these intensifying demographic pressures beyond 2020, it is critical that governments successfully address their deficits over the next 3-5 years.

…
the planned moves by Ontario
and B.C. to harmonize the retail sales tax with the GST are
examples of good economic policy

the flaw in using deficits and debt as primary operational targets is that their path is determined largely by factors out of government control, notably revenues and GDP. Program spending, by contrast, is under the direct purview of governments, and should in our view, become the operational target. Program spending targets should be absolute, and determined to a large degree exogenously from the pace of economic growth. In recent years, the federal government has been pitching the notion that the rate of program spending growth should, and will be determined by the rate of economic growth. The challenge with such a rule is that it sets fiscal policy to be highly pro-cyclical, since spending is strong when the economy is strong, as opposed to allowing the economic strength to facilitate balancing the budget sooner or even cutting personal income taxes. Conversely, during weak economic times, the government exacerbates the downturn by more aggressively cutting spending.

…

To the extent that deficits can’t be brought down through lower spending growth, governments might have to consider revenue-raising measures. If this avenue is undertaken, care must be taken on shifting the tax mix from a reliance on savings, capital and income – which are the most damaging levies on growth – to consumption. While structured as a revenue-neutral reform, the planned moves by Ontario and B.C. to harmonize the retail sales tax with the GST are examples of good economic policy.

…

Ever since I arrived in Ottawa in early 2005, I've tried to be up-front and clear with all my sources on one crucial point: If you are a politician, a political staffer or a political appointee, you should always consider yourself on-the-record at all times if you're talking to me.

That said, I tell my sources when I meet them for the first time, there is still a way for us to have a frank, candid conversation where you could have a reasonable expectation your name and the things you say won't be all over the paper (or Twitter or this blog) shortly after. But if we agree, I tell them, to keep our conversation on a background basis and you tell me that the Prime Minister will bomb Iran in the morning, well, then, all bets are off and I'm quoting you and doing it as fast as I can. In other words, if I agree to keep our conversation confidential, it's a qualified agreement, never a blanket agreement. Always has been like that for me, always will be.

So what kind of conversations can we have and what are the ground rules? (This came up to today as I was explaining to someone I hope to have a lasting, productive source-reporter relationship with.) Here's my taxonomy:

1. On the record This is the best kind of conversation for my money. If we're “on-the-record”, as I think everyone understands, I will quote you directly and I will attribute by name and position those quotes to you. I will use information you've given me and identify you by name and position as the source of that information.
2. Background If we speak on background, I will quote you directly but I will not attribute those quotes to you by name. I will use information you've given me but not identify you by name as the source of that information. I will have to provide some information about you in order tell my readers why it is that you are qualified to speak on a given item. I want to provide my readers with enough information that they can make their own judgement about your credibility. I will also try to explain why I'm not identifying you by name. The very fact that you seek anonymity hurts your credibility. Because anonymous sources are less credible, they hurt my credibility too and that's why my organization, Canwest News Service, challenges my use of anonymous sources and restricts their use. Under almost no circumstances will my organization allow gratuitous political potshots from an unnamed source. You wanna piece of your political opponent? Prepare to put your name on it.
3. Deep background I will not quote you directly but I will paraphrase what you tell me. I will not identify you by name as a source and, depending on the circumstances, I may agree not to even provide a description of who you are. I may have to provide my readers with an explanation about sourcing information in this way but recognize that there will be some instances when I will have to refrain from even doing that. We routinely agree to give government bureaucrats “deep background” status during technical briefings about federal finances or new legislation but we do so knowing that the responsible politicians will be giving us an on-the-record briefing on the same issue. It is rare for someone from the political class to be given deep background status.
4. Off the record No one should ever tell me anything off the record because, in my books, it means just that: I can never put it on the record in any form. This is information I cannot use and, as such, it is useless information for a reporter. If it must stay off-the-record, tell a senior editor or a publisher. There is a place to tell a news organization something off-the-record — PM trips need to kept confidential, for example, for security reasons — but don't tell me (cuz I'm always trying to find out about the PM's future plans), tell someone way beyond my paygrade.

Two important caveats that apply to the above:

1. In all cases, you should assume we are speaking on a for-attribution, on-the-record basis. Ask first if you need to tell me something on background.

2. There are no 'shield laws' in Canada that protect the confidentiality of the reporter-source relationship. Judges can (and, too often, do) order reporters to identify their sources. I and Canwest are committed to fighting these orders. Now, if a judge wanted me to 'fess up on pain of going to jail, would I go to jail? Depends. Ask first. 🙂

3. In almost all cases, I will have to tell someone in my organization who my sources are. They may have to tell a senior editor at one of our member papers. We do this for our own protection and information like this is shared on a limited basis only with senior people.

4. If you persuade me to treat our conversation as background and then lie to me or say the same thing to another reporter on-the-record, all bets are off, and what you've told me in confidence, is now on-the-record.

That's about it. Any questions?

The Post goes with Pakistan, the Globe goes with H1N1 and the Star leads with Balloon Dad. Get my three-minute audio summary of leading front page headlines plus highlights from Parliament's Monday daybook by clicking on the link below. You can put this summary on your iPod by the way by subscribing to my AudioBoo stream, via iTunes. You can also get an RSS feed for my audio updates. Both the iTunes link and the RSS link are at my profile at AudioBoo.fm. Look under my picture on the left hand side of the page.

Whether by accident or design, Prime Minister Stephen Harper is transforming himself from the politician that journalists once nicknamed “Mr. Angry” to one pollsters say an increasing number of Canadians are beginning to like.

It may seem crass or shallow, but a politician’s “likability” can be the extra intangible that, in Canadian politics, can mean the difference between minority and majority governments.

“Absolutely,” said Darrell Bricker, CEO of polling firm Ipsos Reid. “When you take a look at a guy like (former Liberal prime minister Jean) Chretien, that was clearly the case. People liked him. They saw him as a guy just like them. But that has always been the missing factor with Harper. He was seen almost like an accountant or a funeral director, very mannered and cold.”

Whether it was Chretien, Pierre Trudeau, Brian Mulroney or John Diefenbaker, when those leaders won majority governments for the first time, they enjoyed a high degree of personal popularity among the electorate.

“For the longest time, ever since his return to politics, both the party and (Harper) were described as ‘scary’ and ‘mean’ and so on,” said Goldy Hyder, who, as a vice-president for public relations firm Hill and Knowlton, advises clients on reputation management. Hyder is also a Conservative who has known Harper since they were both students at the University of Calgary.

“But Stephen Harper has not proved to be the things that the opposition has accused him of being,” said Hyder. “The Stephen Harper we’re seeing more of is a guy who is more and more comfortable with himself and with the role of being prime minister. That has led him to surprise Canadians who are surprised to find that they like what they see.”

Harper has always rated high on trust and competence, but in three general elections against what were arguably weak Liberal campaigns and opponents, those qualities have only given Harper a two-and-one record: One loss and, to use Bricker’s description, two “grudging” minority governments.

A lot of chatter this morning about the following:

The Liberals also accused the Harper government of violating federal advertising guidelines in cheque presentation ceremonies — the “grip-and-grin” media events where a local MP hands over an oversized cheque to a local group.

The Liberals say they have more than 50 examples where a Conservative MP hands over what Easter called “Government of Canada cheques disguised as Conservative cheques.”

In one case, B.C. Conservative MP Colin Mayes hands over a cheque with the Conservative Party logo on it and his own picture on the cheque.

Nova Scotia Conservative MP Gerald Keddy also put his party's logo on a $300,000 cheque for a hockey rink upgrade but Keddy went further and signed the cheque himself.

In Ontario, Conservative MPs Scott Reid and Larry Miller dispensed with party logos but put their own names in large print in the top left corner of cheques they handed out, making it seems as if the cheques were drawn on the personal accounts of Reid and Miller.

The Treasury Board has guidelines on government communications and advertising. Here's a couple of key points from the rules:

• Values and ethics: Communicating in a manner that affirms Canadian values of freedom, openness, security, caring and respect. Informing the public about policies, programs, services and initiatives in an accountable, non-partisan fashion that is consistent with the principles of Canadian parliamentary democracy and ministerial responsibility.
• Corporate identity and visibility: Helping Canadians recognize the activities of their government and its institutions through clear and consistent identification. Ensuring appropriate use of official symbols, as prescribed by the Federal Identity Program.