Trade is Aid?

Every now and then I question whether or not I make the right choice by not exercising my citizen duty to vote in elections. While I am not a fan of the Conservative Party, I certainly am not a fan of the Liberals or the NDP. I often wonder if I should be more pragmatic and subscribe to ‘strategic voting’ by supporting the party of least damage. It doesn’t take long until my position is reaffirmed. Today is one of those days where I am reminded why I never vote Conservative.

Recently, our Finance Minister Jim Flaherty announced that tariffs on more than 1,000 items imported from 72 countries will be increased in 2015. The move will transfer $1 billion dollars from the economy to the federal budget. Any sensible economist would know that the true damage to the economy due government inefficiencies and the nature of tariffs as a tax are surely greater than $1 billion dollars. It is expected that the import tax will raise prices by an average of three percent on popular products including electronics, clothing, shoes, and appliances.

The rationale for this is brutal. Canada maintains a preferential tariff regime which has not been updated since 1974. According to Flaherty, “It was meant to help developing countries. Countries like Hong Kong and Singapore, we were giving them preferential tariffs while their per capita GDP was higher than Canada’s”.  The idea is essentially that tariffs would not be applied on developing nations to the same extent as they are applied on developed nations. The government would altruistically not tax consumers on imports from these countries as a form of foreign aid. This thinking is based on the belief that trade is a zero sum game where allowing exchange with less developed economies means sending a portion of our economic pie away to foreign nations so they can grow. The extent of Flaherty’s anti-market bias is apparent when he argued, “we should not be subsidizing by a preferential tariffs, countries that are no longer in that category of being underdeveloped countries. This includes the BRIC (Brazil, Russia, India, China) countries and they’ve been removed from the list.” Apparently BRIC countries have been ripping us off by becoming more efficient at producing things Canadians want. Good thing the free market Conservative Party is here to save us from our own choices!

Markets are a spontaneous self-ordering system with voluntary exchange at its core. Voluntary exchange dictates that in order for a transaction to occur, both parties must see a personal benefit or else the transaction would not have occurred at all. Trade is not aid. Trade is a mutually beneficial two way street where both parties leave feeling better off. It does not matter whether we are trading with people poorer or richer than us, we are better off either way (and so are they). There is no such thing as a preferential tariff. Tariffs only block and distort preferences. They prevent individuals from engaging with one another in their most desired way and in doing so; they raise the cost of living on everybody. People now have to spend more for the same thing. While, it is understandable that it is unfair that imports from less developed nations face higher taxes than those from more developed nations, the solution is not to bring everybody down to the same high tax level. The small-government thing to do is to instead lower taxes for everybody. Our preferential tariff does not need to be updated. We don’t need to re-examine how to effectively implement a policy based on fallacious premises. We need to obliterate the policy all together.

-Ian CoKehyeng

When it Comes to Balancing the Budget, Tomorrow Never Comes

Earlier this month, Finance Minister Jim Flaherty released his fall update of economic and fiscal projections.  In releasing the update, the minister notes that Canada has performed better than any other country in the G7 in the recent global economic crisis.  The update nonetheless projects that the government’s goal of returning to a balanced budget has been pushed back another year from 2015-2016 to 2016-2017.  The longer Canada remains in deficit, the higher our debt grows and the more vulnerable Canada becomes to future economic shocks and fiscal pressures.

Since 2009, the governments’ budget reports predict decreasing budget deficits in coming years. When those years come, however, the budget deficit is almost always greater than predicted.

Federal Budget Balance, Actual*, and Projected 

Budget Balance 2010-2011 2011-2012 2012-2013 2013-2014 2014-2015
2009 Budget Balance -29.8 -13.0 -7.3 0.7 NA
2010 Budget Balance -49.2 -27.6 -17.5 -8.5 -1.8
2011 Budget Balance -40.5 -29.6 -19.4 -9.5 -0.3
2012 Budget Balance -33.4* -24.9 -21.1 -10.2 -1.3
2012 Fiscal Update NA -26.2* -26.0 -16.1 -8.6

As the Finance Minister has acknowledged, one main reason why Canada weathered the recent economic storm better than most other industrialized countries is that it entered it in a better fiscal position than most. Canada has in fact experienced the most growth among G7 countries following the recession (5% employment growth through the years following the recession, with the US second at about 3.5%).  This can be attributed to two things.  First, Canada has been fortunate due to commodities: Canada is rich in natural resources, and commodities prices—though lower than expected due to reduced global demand—have created profits in the resource sector, which have benefited Canada through the higher capital to labour ratio.  Second, the government increased spending from 2002 through 2008 to cushion the Canadian economy from the spillover effects from the US sub-prime mortgage crisis and the European debt crisis.

When the Harper government first came to power in 2006, it committed to a fiscal plan of maintaining small budget surpluses and gradually paying down the public deplaned debt.  It deviated from that plan in the aftermath of the 2008 financial crisis, which began with the subprime mortgage collapse in the US.  The government’s 2009 budget introduced significant economic stimulus to offset the fallout from the financial crisis. That stimulus was to be temporary.  The 2009 budget called for large budget deficits in the immediately succeeding years, but a return to surpluses by 2013-2014.  As the table shows, however, the budget deficits have grown much larger than originally projected and the target date for returning to surpluses has receded further into the future.  As a result, the federal government will have accumulated nearly $100 billion more debt than it planned for when it first adopted its stimulus program.  To this mounting deferral federal debt, we should also add public debts accumulated by provinces and municipalities throughout the country.  Currently, all provinces but Saskatchewan are running deficits, adding to the debt burden of Canadian taxpayers.

Canada may be performing well relative to other economies currently, but emerging economies like China, India and Brazil are exhibiting steady growth.  Against China’s 8% yearly growth, Canada, at 2%, cannot remain ahead for long.

In the times ahead, it is likely the budget will only become more difficult to balance.  The volatile situation in the Middle East and influx in globally set commodity prices could further plunge Canada into debt.  The Eurozone has further contracted, and the US fiscal cliff is impending.

It is important that Canada remain fiscally robust not only because the global economic environment remains fragile and the short economic outlook is fraught with unpredictable risks, but because of the predictable demographic challenges that Canada faces in the years ahead.  Canada’s populating is aging rapidly and this trend will impose increasingly tough strains on the nation’s finances.  Currently, Canadians of retirement age make up about 13% of the Canadian population.  In a decade, they will make up close to 22%. With the large cohort of baby-boomers entering retirement and exiting the labour market, labour force growth will slow drastically.  Economic growth can be expected to slow, and consequently government revenue growth will slow.  On the other hand, pressure on government spending will increase owing to higher pension payments and increased demands for healthcare services.  The combined effects of these forces imply increasingly tougher strains on the nation’s finances in the years ahead.  Adding to those strains by passing on today’s bills to the future is neither prudent for the Canadian economy, nor fair to future taxpayers.

-Stami Zafiriou