CAW's Jim Stanford: Canada 2020 Pre-Budget Debate 2011

8/7/2019 CAW's Jim Stanford: Canada 2020 Pre-Budget Debate 2011

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Debt and Deficitin ContextJim Stanford, Economist, Canadian Auto Workers

For Canada 2020 Pre-Budget Seminar

Ottawa, January 2011



Government Debt

0%

10%

20%30%

40%

50%

60%

70%

80%

90%

100%

1990 1995 2000 2005 2010

N e

t F i n a n c

i a l D e b t , a

l l L e v e

l s % G D P

.



A ´Chill Pillµ:

The Debt Stability EquationD/GDP = (i-y)D/GDP + DEF(prim)/GDP

i (fed) = 5.8%y (2Q) = 6.7%

fed = 32% fed = 1%



A ´Prototypeµ Recession Star t with balanced budget Nominal GDPdecl ines 2.5% f or one yea r Then nominal GDPgrows at 5%Deficit rises to 3% of GDP in recess ionDeficit eliminated over 8 y ea rs

10-yea r bu dget c ycleDebt is sta ble, with no surpluses



A ´Prototypeµ Recession

0%

10%

20%

30%

40%

50%

1 2 3 4 5 6 7 8 9 10

D e

f i c i t & D e

b t a s

% G

D P

.

Debt DeficitBack to

30%



Canada Has No Deficit ProblemDebts are low by histo rical and inte rnat ional standa rds .Deficits are clea r l y c yclical. Inte rest rates are low (and likel y to remain the re).



W hy W e May WA NT

Continuing Deficits Recovery is sluggish, fr agile, slowing. Recovery (so f ar) has been driven by

consumers, government . Recovery in business invest ment and expor ts has been slow, leaving an

economic vacuum.



A n ´ A nimal Farmµ Theory

of Debt

´ Private debt good, private debt bad .µ Like an y othe r b orr ower , public debt makes sense to finance product ive long-lived assets .



Peak to Trough and Back3.3% down (3Q 08-2Q 09 )3.6% up (2Q 09 -3Q 10) Level of GDP recove red . Composit ion of growth has changed .



-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

C G H I Net X Oth

% C

o n

t r u

t o n

t o G r o w t h

eak to Tr ough

Tr ough to Now

Business Leads the W ay Down«



-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

C G H I Net X Oth

% C

o n

t r u

t o n

t o G r o w t h

eak to Tr ough

Tr ough to Now

«Then Sits on the Sidelines





W here Is The Engine?



Business Investment

160

170

180

190

200

210

2006 2007 2008 2009 2010

B u s

i n e s s

N o n - R

e s

i d e n

t i a l C a p

i t a l ( $ b i l )

.



Exports

420

440

460

480

500

520

540

560

580

600

620

2006 2007 2008 2009 2010

E x p o r t s o

f G o o

d s a n

d S e r v

i c e s

$ b i l

.



Borrowing by Sector ($b)

$0

$50

$100

$150

$200

$250

Cons me s Gove nments B sinesses

N e w

B o o w

i n Q

2 / 0 8

- Q 2 / 1 0 $ b



Elephant in RoomFede ral-pr ovincial t ransf ers.Provincial fiscal const raints are much more se rious than f ede ral. Balancing f ede ral budget by

´

pass ing the buckµaccomplishes noth ing:² T ransf ers debt to highe r-i nte rest

borr owers.² Th reatens necessa ry invest ments in human

and soc ial capital .



Growing Gap

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

Alt S k fld d Ont M n Qu S PEI

G D P /

p .

( 2 0 0 9 )

2-t o- 1



ConclusionsDon·t panic on de ficits . More st imulus (not less ) needed unt il business sta r ts working.Fiscal f ede ralism needs to get st ronger(not weaker) to recogn ize unevenness ofreso urce dependence and de indust rializat ion.



A lternative Federal Budgetwww.polic yalte rnat ives .ca

Released in mid-Febru ary

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CAW's Jim Stanford: Canada 2020 Pre-Budget Debate 2011