The IMF and the Bank of Canada have revised their growth projections for Canada downwards to 1.5% for the coming year. The IMF is also warning Canada not to pull too hard on the reins of austerity while the economy remains weak and vulnerable to shocks.
Canada's anemic economic growth is a result, in large part, to self-inflicted wounds. Last year's harsh austerity federal budget reduced Canada's GDP by .56% lower than it would have been without the cuts, according to the Parliamentary Budget Office. This translates into an impact on employment of 67,000 less jobs.
With inflation and interest rates at relatively low levels, it is hard to understand the obsession with government debt and deficits. Government debt and deficits are a legitimate concern if they become difficult to finance and if they squeeze out program spending. But this is not the case in Canada at the federal level. And, with a few exceptions, for most provinces.
The more troubling economic indicator is the high rate of unemployment in most parts of Canada. And here again, one of the biggest drags on employment has been federal and provincial austerity measures.
Tax cut policies, especially corporate tax cuts and tax cuts for the rich, have been largely responsible for the government deficits. But they have not worked to stimulate corporate investment, job creation or economic growth. Government stimulus spending has been much more effective at achieving these econimic objectives. And now that the tap has been turned off, we are all suffering.
It would be far better to open up the spending tap a bit to stimulate the economy and finance this by rolling back the corporate tax cuts and closing tax loopholes that mainly benefit the rich. This would help to boost employment and economic growth, and lead to higher government tax revenue which would help to reduce the deficit. Even though this approach might take a bit longer to eliminate the deficit, it would be a lot less painful and less risky, in terms of avoiding falling back into a recession.
Fortunately a number of provincial governments, including BC, New Brunswick and Manitoba, seem to have realized the wisdom of revenue side solutions to their fiscal challenges and raised taxes rather than inflict further austerity.
But the federal government does not seem to have got the message that austerity is the wrong medicine for the economic ailments that infect Canada. Even though they did not prescribe much more bad medicine in this year's federal budget, the negative economic side-effects are only now becoming evident in economic indicators. It should have been clear that this demanded an easing of the austerity measures they had introduced. But because of thier political fixation with eliminating the deficit before the next election, and their ideological blinders to revenue side solutions, they have decided to go full steam ahead, despite the stormy economic weather.