Bad news for the deficit hawks: The storm clouds are parting

Some have observed that doom-and-gloom scenarios for our economy and the world economy provide the political cover for politicians to engage in initiatives, such as cutting public services, which might be politically unpopular.  Prime Minister Stephen Harper’s speech in Davos last week was a good example the kind of doom-and-gloom diagnosis for which the prescription is convincing enough Canadians they are no longer entitled to their entitlements.

Mind you: The political opponents of the federal Conservatives will argue that a need for austerity in a time of high budget deficits is really cover for the Conservatives to advance an ideological agenda they might not otherwise be able to get away with? Here I’m thinking of cuts to the number of scientists at Environment Canada to trimming the CBC’s budget to cutting entitlement programs like employment insurance or even Old Age Security payments.

But what if there was no need for austerity? What if the diagnosis is wrong? What if those storm clouds are actually giving way to clearer skies? What if the rationale for major cuts — ideological or otherwise — was shown to be false? Cue Bay Street’s Doug Porter, the deputy chief economist at the Bank of Montreal, writing the bank’s morning note (my emphasis added):

Fiscal follies? At the risk of creating an echo chamber, we must point out again that the federal budget deficit narrowed sharply in November to $1.9 billion from $4.5 billion a year ago. This left the deficit for the first 8 months of the fiscal year at $17.3 billion, down heavily from $26.0 billion in the same period a year earlier. Even if there is some deterioration from a year ago over the final four months of FY11/12, it still looks like Ottawa will come in well below the latest $31 billion deficit estimate for the full year, and could even come close to next year’s target of $26.4 billion. And yet, the headlines are full of how the federal government is preparing for deeper cuts and a more rapid attack on the deficit. We would simply ask…to what end? The markets are not exactly braying for deeper restraint from Canada, with 10-year government bond yields of 1.95% close to the record lows hit late last year. Meantime, growth has slowed — our call of a 2% GDP rise this year is on the optimistic side of consensus — and hardly needs another downward shove from even deeper restraint than the already formidable tightening expected from the provinces this year.


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