Recent interviews with Canada’s Finance Minister, Jim Flaherty as well as the Prime Minister, have revealed a small but very significant change in the language being used when describing Canada’s economy and outlook.Gone from the rhetoric are the words Economic Fundamentals to be replaced with Fiscal Fundamentals.To most people they would equate to being one and the same when in fact, they are not.
When discussing Economic Fundamentals, certain benchmarks and indicators are used to describe the state of the economy to provide an overview.Some of these indicators are statistics regarding Unemployment, Gross Domestic Product, Trade Surplus/Deficit, Productivity and Taxes, and Inflation, to name a few.When viewing these indicators on a scale of time, it is possible to see whether Canada’s performance has become better or worse.
Fiscal Fundamentals however are a different story.These are the policies employed by a government on how it will spend its money.First, let us establish that taxes are a fact of life.Taxes are government income which is in turn, spent by the government.The methods of collection and expenditure form the Fiscal Policies or Fundamentals if you will, of that government.Therefore, it is not possible to view Fiscal Fundamentals as a measureable standard but rather as a philosophy of tax and spend of the government of the day.
The fiscal policies of a government have impact on the measureable statistics of the Economic Fundamentals.Such statistics are collected and reported by Statistics Canada.However, one must never accept reported statistics as an absolute, simply because statistics can be manipulated to suit a particular point of view.
As a simple example, consider raw Unemployment Statistics versus seasonally adjusted Statistics.As students enter the workforce in the summer, the Unemployment rates will naturally go down, however by taking the student entry out of the equation we create a seasonally adjusted unemployment figure that should be more reflective of the reality of the workforce.This is why anyone viewing statistics has to first determine where the numbers came from, and secondly, how they were derived.To not do so is to possibly accept incorrect information.
This is why the consumer has to carefully weigh out any claims that might vary from the norm of language and statistical reference.So, the short story is that Fiscal Fundamentals are tax and spend policies and Economic Fundamentals are the effects on the economy.They are not one and the same, but rather cause and effect.
This shift in rhetoric from the federal government can deceive most Canadians.This shift in language was most noticeable during an interview with Carol Martin and Evan Solomon of the CBC’s “Sunday” broadcast of October 26, 2008 where they interviewed Finance Minister Flaherty.During this interview, the minister avoided any mention of Economic Fundamentals instead focusing on “Fiscal Fundamentals”.The minister was therefore, referring to his government’s tax and spend policies.
During this interview, he dodged any questions of reduced government income and increased spending by continually referring to “Canada’s solid Fiscal Fundamentals”.The questioner in this case was Mr. Solomon who wanted to know how the government was going to avoid deficit budgets in the face of reduced income and increased spending, while at the same time recognizing that the current government has spent all of its buffer/savings left from the previous Liberal government.
Mr. Solomon’s point is one that has been raised by this writer many times in the past.The fact that Minister Flaherty dodged the question several times during the interview leads Canadians to wonder what plan the government actually has for combating the coming recession.The unwillingness or inability of the Minister to address this question directly does nothing to assuage the fears of the Canadian people.
Similarly, Canadians have to ask why the Minister has gone to great lengths to assure Canadians as well as foreign investors of the strength of Canada’s financial institutions.In the past he has used the term “Economic Fundamentals” as a guide for reassurance.Most recently, the Minister has announced Federal Government backing of loans between the banks.Why?If our banks are so secure due to their regulatory guidelines, why would the government need to make such assurances?Today, the Minister and Prime Minister are citing Fiscal Fundamentals as the assurance for the banking system.Is this language being used to confuse the population as well as potential investors?
The primary weakness in the Canadian economy today is the same as elsewhere in the world, that being, a credit freeze that has resulted in banks refusing to lend to one another.This of course is directly traceable to the ABCP (Asset Backed Commercial Paper) crisis and the increased potential for default as seen in several major global banks.It is understandable.
When viewing the massive write-downs the banks have taken in the ABCP crisis coupled with reduced foreign investment due to lowered central prime rates, the question of just what direction the federal government is taking has to be asked.
All of this information is leaving this writer scratching his head and wondering if they have a plan in the face of the coming recession.What can or will they do to lessen the blow to Canadians.Deficit budgets with infrastructure spending is a tried and true method to spur the economy but will it be enough?
Canadians should be asking the same questions because government tax and spend policies have a direct effect on Canadians.Employment security as well as social programs can be impacted.The availability of credit to make those big ticket purchases such as vehicles and homes can be more difficult to acquire.Funding for healthcare and education can be reduced again affecting already threatened spheres of our economy.
Will Canadians see tax increases due to the need for deficit instead of balanced or surplus budgets?Are Canadian banks going to need to have government money from guarantees in order to maintain their liquidity?These and many other questions need to be answered.
To quote the character Data from “Star Trek: The Next Generation”; “Most curious”.