Ottawa's New Math

According to our Federal Finance Minister Jim Flaherty, three minus one equals four.

His recent attacks on the Government of Ontario are little more than political maneuvering.  Why?  The answers are simple and uncomplicated, not what the minister or his party would have you believe.

There are very obvious economic problems on the horizon, problems neither he nor his party appear equipped to deal with.  This simply comes down to their own fiscal policies or more precisely; lack of.  Quite simply they are emptying Ottawa's piggy bank and leaving little if anything to soften the hard realities of mismanagement in the American economy on this side of the border.  Yes, the American economy.  In case Mr. Flaherty isnt aware, Canadas economy is closely knitted with that of our southern neighbours.

Mr Flaherty would have Canadians, and more particularly Ontarians believe that lowering taxes in the province will spur economic growth.  In short he is telling the Ontario government to reduce their revenues so they can increase them through a more favourable business climate he seems to believe exists or is waiting around the corner. 

Apparently Mr.Flahertys memory is very short.  This same approach was used during his tenure as Ontarios finance minister under similar conditions and resulted in deficit budgets with increased provincial debt while at the same time removing services to the public.  It would appear that he expects Ontario voters memories to be as short as his own.

So lets look at a few facts before we gaze into our crystal ball.

Ontarios GDP (2006) led the country with approx. 39% or total contribution to the economy.  This is followed by Quebec at 20% and Alberta at 16% with the remainder being split by the other provinces.

Source: Statistics Canada 10/2007  (exchange rate at $0.8818 = US$1)

So, first of all Mr. Flaherty is setting his target as Ontario because essentially it controls the balance of power in Ottawa.  Ontario can make the difference between a majority and a minority government for his party.  Since Ontario has the largest slice of the economic pie, from his perspective it makes perfect sense to attack Ontario in light of the coming economic slowdown.  He can easily criticize Ontario for the inaction of his own governing party, particularly toward aiding Ontarios ailing manufacturing sector and it costs his government nothing.  This is nothing less than deflection of responsibility.  Of course there is always a lap dog media willing to slurp it up without taking him to task.

What he isnt saying in his criticism is that Ontarios real GDP has been shrinking due in large part to a shrinking industrial sector; one that is largely deregulated due to NAFTA.  It should only be a gentle reminder needed that it was a Conservative government under Brian Mulroney who pushed this trade agreement through his own majority government.  This agreement allowed for market forces to dominate the business sector free of government interference; in theory anyway.  Since coming to power, he has done nothing in any of his economic updates or budgets to alleviate this problem.  He has steadfastly refused to match dollar for dollar the assistance the Ontario government has made to this sector yet he criticizes?

Source: OECD Economic Outlook, June 2007; Ontario Ministry of Finance, Budget 2007, Economic Accounts Q2 2007, October 2007 (10/2007) *indicates figures for 2007-08 are projections.

Now Mr. Flaherty wants the Government of Ontario to act irresponsibly because he has a better way?  He wants the McGuinty government to reduce revenues through lowered corporate and business taxes; in an already shrinking economy.  This is supposed to increase investment in its economic engine; indeed Canadas economic engine, the industrial sector.  This of course is supposed to override all other policies of the provincial government toward social programs and infrastructure.  Apparently running Canadas economy is not satisfaction enough for Mr. Flaherty.

Earlier mention was made of the American economy.  It is arguably in a recession but certainly headed for a final proclamation of recession by their economic Poobahs; invariably after the fact.  Cant get better than overstating the obvious.

First and foremost in the Unites States is the Subprime Mortgage Crisis.  I am going to take it a step further and call it a banking crisis.  Why?  Many of the large American banks are unable to maintain their liquidity on overnight lending by the Federal Reserve.  The answer to that by the Feds was to increase the lending from overnight to 30 days.  They also drastically lowered the prime lending rates.

The intended effect of this move is to free up credit so business can get the relief it needs to kick start their economy.  The key word here is THEIR economy, not ours.  By extension, ours will follow down the road.  The problem with this move is that it will not achieve the desired effect because the banks themselves need this funding to maintain their own operations.  They are not going to part with the money until they are on solid ground and they are still holding a large number of subprime mortgages that have yet to come due.

Mr. Flahery conveniently ignores the complicity of Canadian banks in this crisis.  Most of the banks have taken write downs on their financial statements because of the Subprime Mortgage Crisis.  Several have had to restructure their own asset backed securities to cover these losses.  The net effect?  The Canadian banks will also tighten credit.  All of this eventually washes down to the consumer who loses confidence and tightens their own belt by not buying big ticket items.  Money is taken out of the economy in the form of savings and credit is tightened at all levels further fueling the economic slowdown.

Meanwhile, back in Ontario, the automotive sector that has primarily been the largest contributor to GDP is continuing to shrink due to financial problems with the Big Three coupled with increased competition and market share by offshore auto makers.  Unless the Big Three can turn their fortunes around, the already established trends will continue.  The Canadian automotive sector is entirely dependent upon the goodwill of its American parent companies and customers.

Now enter the loonie that has increased in value against the greenback to such an extent that Canadian exports are now more expensive to buy.  This is further complicating the problems in Ontario who depend on exports to drive its economy.  The reality is that the loonie hasnt increased in value as much as the greenback has slipped.  Compared to other world currencies, the loonie is predictably stable.  In this light, it makes Canadian offshore exports somewhat attractive.  However, our business is still primarily with the US despite some gains in offshore exporting.

Mr. Flaherty needs to turn his calculator around because reading it upside down is doing his party, Ontario and Canada no favours.

So where does this leave the consumer?  There is little the consumer can do politically until it is time to cast a vote.  The McGuinty government is acting to prop up the manufacturing sector thus attempting to keep jobs.  Those jobs are crucial to minimizing any slowdown in the economy.  Still, Ontario with its massive economy cannot weather a continental if not global recession alone.

Accounting for the fact that a recession in Canada is inevitable, Canadians need to get their houses in order.  Remember it is credit that drives the economy and when that is withheld by the banks business will slow down until the banks again make it readily available.  This can have serious negative consequences for Canadians and their families.  

Canadians should ensure their money is not only accessible but safe.  This means that savings should be able to be accessed when the need arises.  Unfortunately, EI may not be enough to sustain a family for extended periods.  It will run out eventually.  In this dire circumstance money saved must be available within a short period of time.

Debt loads need to be reduced.  This means paying off all loans and credit cards as quickly as possible.  The last thing anyone should have to do during hard times is use savings to pay off loans.  If possible, renegotiate mortgages to equity based lines of credit.  These can hold interest rates as low as prime which is considerably less than a variable rate loan or mortgage.  This gives the consumer the ability to reduce payments to interest only.  That can make the difference between eating or not, or worse, between losing or keeping your house.  The additional benefit is that it provides a bit of a safety net because previously used credit is now available in an emergency.

If you are laid off or fired, contact the benefits insurer to see if you can carry the cost on your own.  If you have a young family this could very well reduce medical expenses and for a reasonable cost.  A couple of trips to the dentist can equal the cost of the benefits package so it is a good social investment in your familys welfare

Trim the fat.  If you have car loans on a second vehicle you may want to consider selling the vehicle.  It will additionally save the operating costs of fuel and wear and tear but also insurance.  If both vehicles are paid for, decide which of them can sit in the driveway and dont drive it unless it is essential.  If possible, cancel all insurance except fire and theft coverage and dont drive it.

Cell phones plus a house phone?  Which is going to be the main mode of communication?  Cancel the other.  Satellite dish or cable?  Go for the least expensive package or look for bundled packages that can save money every month.

Reduce household energy consumption.  Change the bulbs to low energy ones.  Turn down the heat or open the windows instead of running air conditioning.  Have a barbeque instead of going to a restaurant.  It has the benefit of family participation.

When faced with tough times, Canadians can rise to meet the challenges.  Sometimes it just means being creative, for others it will mean curtailing lifestyle.  One thing can be assured; economies are cyclical and governments replaceable. 

This leads us to the question that needs to be asked: Who is right; the Federal Government or Provincial Governments?  

History is a great teacher.  Do your homework and you decide if Mr. Flaherty is right or wrong.  This writer believes he is dead wrong.

Harold Hotham

harold.hotham@comparevillage.ca

www.CompareVillage.ca