Unveiling the truth behind the Harper surplus: recession and risk

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Some commentators have argued Ottawa's reported return to surplus is good news. I respectfully disagree. It is not. The Harper conservatives' road to surplus has been shifty, pushing us into recession along the way and leaving taxpayers vulnerable to rising interest rates. Meanwhile, as Ottawa banks on housing to boost the economy, the long-term ability of our economy to compete and create viable jobs becomes less certain.

Let's address risk. The untold story of the Harper surplus is off balance sheet commitments. Specifically, the Parliamentary Budget Officer reports that loan guarantees on behalf of crown corporations and others soared from $151 billion in 2007 to $407 billion in 2014. Believe it or not, today that's about 20% of GDP. These liabilities, such as those at CMHC, are what the IMF has characterized as "hidden deficits."

No wonder Stephen Harper is attacking the rights of a handful of women in this country to cover their faces. This ridiculous, disturbing and desperate move serves as an effective distraction from the risks surrounding his hidden deficits. Instead of telling a handful of courageous women to show their faces to him, Stephen Harper should spend the last week of the campaign revealing to us why he is risking 20% of the economy on loan guarantees that we know very little about. 

Remarkably, as these loan guarantees grew, the Harper conservatives reduced "rainy day" allowances for bad debts. Liberal accounting was clearly a key factor in helping the Harper conservatives show a better bottom line. For true fiscal conservatives, the claim of surplus leaves many question marks.

I wholeheartedly agree with those who say that deficits should not be used to boost bureaucracy. Unfortunately, it does not take a deficit to increase red tape. Look at Bill C-28, a draconian Harper conservative initiative that gives the CRTC the power to regulate how Canadian firms communicate electronically. For those who believe that the Harper conservatives are pro-market, they should visit the CRTC website to see how they are regulating all commercial emails in this country. Apparently, free-market conservatism does not mix with Harper conservatism.

In contrast to running a deficit to build a bureaucracy or expand social programs, the case for borrowing to invest in needed infrastructure is much stronger. The Federation of Canadian Municipalities estimated we needed $123 billion in new roads, bridges, treatment plants and transit in 2007. With global bond interest rates at generational lows, it makes sense to move now while favourable terms can be locked in. Let's say we dither and rates move up 2% over the next 10 years. If we still haven't made half those investments, financing costs will increase by more than $1 billion per year. More importantly, we would also have given up the enjoyment, productivity and prosperity that can come from those investments.

Even more worryingly, cunning trading competitors such as China are not standing still, having spent billions building the means to move goods and ideas to market. We need to beat them, not just keep up.

Taxpayer undertakings envisioned by Justin Trudeau to boost infrastructure pale in comparison to the risky level of liabilities already racked up by the Harper conservatives. Of course infrastructure is not a cure-all to our competitive challenges. Outcomes will depend on policy objectives and discipline. But make no mistake, an ambitious and fully transparent infrastructure plan could pay dividends for decades.

Moreover, I am willing to bet that investing in highways, ports and other essential components of our national supply chains is a better way to go than handing out tax breaks to renovate basements as the vote-hungry Harper conservatives are promising to do if re-elected. Sustainable wealth creation in Canada will be derived from innovation and selling it, not from real estate speculation.

While deficits are no panacea for our challenges, neither are surpluses. Particularly when the Harper strategy to get to surplus included ultra-loose monetary policy during a period of economic expansion. The premature devaluation of the loonie engineered by the Harper appointed central bank governor in 2013 promoted over-investment in the oil patch generating excess capacity which pushed us into recession. More pain is likely coming. Soaring retail prices now limit the ability of the central bank to further lower rates leaving Harper economics in a big bind post-election.

Worse, if long rates begin to rise, not only will we miss out on being able to make strategic infrastructure investments due to financing costs, but some of those guarantees piled up by the Harper conservatives will start to come due as default rates likely rise. At that point, it will become clear the Harper surplus was nothing to cheer about.

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