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MetroVanIndependent.com
August 2015
editorial
Why the Central Bank’s interest cuts
won’t solve Canada’s economic woes
NUTS & BOLTS
By Yul Baritugo
In a hypothetical economic model, an
armchair economist can stimulate Canada’s
economy either by monetary policy which
means cutting interest rates or through
fiscal policy by increased government
spending to fuel economic activity. This is
classic textbook economics.
T he f i sc a l ave nue i s what the
Conservatives refused to do – increased
spending -- as they are intent on achieving
a balanced budget by doing a conservative
massaging and tinkering of the national
income accounts.
Government revenues, generally comes
from broad economic activities as reflected
in its gross domestic product (GDP), the
sum total of all economic goods and
services produced by a country. As a rule
of thumb, every one percent drop in GDP
translates to a $4.1 billion account deficit.
But the Conservatives appropriated
billions in surpluses from the Employment
Insurance (EI) account and sold billions
more of General Motors shares, an action
that cannot recur since these assets have
effectively been dissipated and earmarked,
“The Voice of the People, by the People,
for the People.”
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to counter anticipated shor tfalls in
government revenues today. It also ties
the Feds hands in the future.
It means Canada’s real economy
contr ac te d. It also me a ns the EI
account was used to pay for the federal
government’s liabilities, including the $3
billion child welfare adjustments, instead
being used to pay money -- which is
bridging income -- to the unemployed. The
net effect of this foolish financial action is
that the next budget will be saddled, with
billions representing the EI liability which
has to be repaid, to simply to balance the
2016 budget.
Next year, a more severe contraction
of the economy is expected to have an
adverse effect on government revenues
and money flows which can result
in a bigger budgetary crisis. Will the
government appropriate more money from
the EI account, will the Conservatives sell
other assets or cut more jobs to balance
the budget opting for a Conservative
Nirvana of small government? Will they
ask for assistance from the International
Monetary Fund (IMF)?
These moves are the net effect of
balancing the budget in a sinking economy.
This year’s expe nsive exe rcise
can be viewed as nothing more than a
Conservative election stunt. It is nothing
more than Harper’s pipe dream. A
balanced budget has minimal economic
impact especially if it is achieved by
artificial means such as a combination of
borrowings, fund realignment, spending
and job cuts. A balanced budget’s benefit
to the real economy is totally illusory.
The Central Bank can only hope that
interest cuts can stimulate the doldrums
palpable in our exports activities. Our
balance of trade is horrific. In 2011, even
our export data with Greece showed we
exported $88 million while Greece sold us
$168 million resulting in a trade deficit of
$80 million. Ironically, the Greek economy
is in tatters and we could soon follow.
Low oil prices and a downtrend
in commodity prices actually placed
Canada’s economy in technical recession.
Total trade imbalance have reached over
$3.4 billion with just four months data this
year.
Economic adjustments in Canada’s
trading partners such as the United States,
China and Europe, and other outside
factors, weigh heavily against achieving
incre