Like many of Canada’s 1.4 million unemployed, Sean Griffiths blames his plight on government cutbacks. Sixteen months ago, a cost-cutting drive led to the elimination of his job as a computer technician for the Ontario government. Unable to find employment since, he now works for free, programming computers at Toronto’s Daily Bread food bank. “It was the first real job I ever had,” says Griffiths. “How does the government expect me to live?” Griffiths’ frustration is understandable, but what might come as a surprise is the fact that at least some prominent Bay Street analysts share his doubts about the pace of government cutbacks. Last week, Jeff Rubin, the respected chief economist at CIBC Wood Gundy Securities Inc., issued a report that concluded that fiscal restraint at the federal and provincial levels has reduced eco-
nomic growth by 3.5 percentage points since 1994—costing the country almost
500,000 jobs. “The economy is having difficulty absorbing the rate at which deficits have melted,”
Rubin told Maclean’s.
“And looking ahead, we’re not out of the woods.”
Rubin’s findings raised eyebrows in Ottawa in part because he had previously been known as a strong supporter of deep government cuts. “Rubin was part of the Bay Street mafia that called for less government and a balanced budget,” recalled Michael McCracken, an Ottawa-based economist who for years has advocated a stronger federal focus on job creation. Rubin’s report, co-authored by fellow Wood
Gundy economist John Lester, says that by the end of the current fiscal year, combined federal and provincial deficits will have declined to $32.1 billion from $66.1 billion in 1992-1993. By 1998-1999, the total deficit figure is projected to drop to $15.8 billion.
While debt-rating agencies, foreign investors and most Bay Street economists have applauded the spending cuts, Rubin maintains that the unemployed have paid too high a price. Based on the assumption that each one-percent increase in the gross domestic product translates into
150.000 jobs and $11 billion in economic activity, he says the deficit-cutting has cost Canada about
500.000 jobs. He adds that, had it not been for those cuts, the unemployment rate would stand at about eight per cent rather than 9.8 per cent. “The scale of fiscal drag,” adds Rubin, “suggests restraint is the principal culprit behind the unprecedented weakness of the recovery.”
Rubin notes that the Bank of Canada has tried to keep interest rates low in order to
Average annual jobless rate
1992-93 1993-94 1~,4-95 1995-96 1996-97
offset the dampening effect of public-sector spending restraint. In theory, lower borrowing costs should lead to increased consumer spending, which would spur private sector job creation. The Bank of Canada rate has been cut 16 times in the past 16 months; at 5.75 per cent, the prime rate is now at its lowest level since 1994. But Rubin said the cuts have not worked because many Canadians who do have jobs are mired in debts of their own and are therefore unwilling to spend. “Interest rate cuts are not effective,” Rubin concludes, “in an economy with very little income growth and virtually no savings.”
With the country seemingly on the edge of a recession, Rubin favors more direct measures to stimulate the economy through tax cuts. He points out that Finance Minister Paul Martin’s restraint measures have been so successful that he will likely overshoot his $17-billion deficit target for fiscal 19971998 by about $4 billion. Instead of using that money to pay down the deficit, Rubin says that Martin should return it to Canadians in the form of a tax break. Consumers, he believes, would then spend the money and create jobs. “One could be skeptical about how much added stimulus we will get out of an interest rate cut,” says Rubin. ‘Would it not now be better to use that fiscal windfall to stimulate the economy?”
McCracken agrees, but along with a moderate policy of deficit reduction he favors further cuts in interest rates. To support his argument he points to the United States, which has an unemployment rate of just 5.6 per cent. McCracken argues that the U.S. economy has done well because it has benefited from lower real interest rates— the difference between nominal interest rates and the rate of inflation. As a result, McCracken argues that there is still plenty of room to reduce borrowing costs in Canada. Combined with slower deficit reduction, he says, that would fuel an economic turnaround.
Martin, however, shows no sign of easing up in his war against the deficit. While brushing aside the notion of direct tax relief, Martin said in Ottawa last week that lower interest rates had collectively saved Canadians millions of dollars in mortgage payments. Rubin, however, believes that as Canadians become more disenchanted with the economy, pressure will mount to cut taxes. And there are signs that politicians are paying attention. In June, Ontario Premier Mike Harris instituted the first phase of a 25-per-cent cut in the provincial personal income tax rate. And on Aug. 22, delegates to the Progressive Conservative party convention in Winnipeg adopted a motion to cut federal taxes by 15 to 20 per cent over several years. Meantime, the legions of unemployed Canadians would like a crack at those 500,000 missing jobs.
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