The politics behind Stephen Harper's fixation on a balanced budget
Falling oil prices have sent federal revenues into a tailspin, but the PM is not for changing course
Stephen Harper is often referred to in the media as a trained economist. As his government celebrates nine years in power on Friday, the better description might be that he's an instinctive politician.
How else to explain the prime minister's stubborn determination to keep a four-year-old election promise to balance the budget by 2015, a promise his finance minister, Joe Oliver, kept repeating all week despite warnings from other trained economists that dropping oil prices will cut into federal revenues, and stunt economic growth this year.
The most recent warning came on Thursday, when the governor of the Bank of Canada, Stephen Poloz, lowered his forecast of economic growth in the first half of 2015 to a meagre 1.5 per cent.
- PM says falling oil prices will not throw government off course
- European Central Bank announces massive stimulus program
"What it's going to do is reduce our flexibility, but it's not going to undermine the commitments we've made nor is it going to undermine our ability to actually get a balanced budget next fiscal year," Oliver told Bloomberg News when asked about the drop in oil prices.
Oliver, of course, takes his marching orders from Harper. And the prime minister's economic training is taking a back seat to his political instincts in an election year.
These are the instincts that tell him that a promise is a promise, and commitments to allow income splitting by families with children will be honoured no matter what the numbers show.
"What the government will continue to do to build, create and protect jobs is to follow our economic action plan… keeping our taxes low and having sound public finances," the prime minister told reporters Thursday during a visit to St. Catharines, Ont.
In hindsight, the decision last fall to announce income splitting for Canadian families with children might have been unwise, even rash.
Since then oil prices have continued their downward spiral, forcing Oliver to announce that he's delaying the spring budget until April — at the earliest — because of market instability.
With oil prices dropping from $110 a barrel at the time of the last budget to about $50 now, it's easy to understand why Oliver made that decision.
What he hasn't said is what market stability will look like, whether it's several weeks of rising prices, or just weeks when the price drop can be measured in cents rather than dollars.
Unusually mixed message
Just as notable is that this government appears uncharacteristically confused in its messaging.
After sending out a senior cabinet minister over the weekend to suggest further spending restraints might be necessary to balance the books, the government dispatched un-named officials on Monday for a round of hair-splitting — to argue that spending restraint isn't the same as spending cuts.
To his critics, Harper's fixation with balancing the books puts politics over policy.
For many economists, editorialists and political pundits, the government would be smart to inject some stimulus, and to run a deficit for another year or so, to counter the drop in oil revenues and the job losses that will undoubtedly flow from it.
"It make no difference whether Ottawa runs a surplus of a few billion or a similarly-sized deficit," said the Globe and Mail.
"There's nothing magic about zero deficit," former Bank of Canada governor David Dodge told CBC Radio's The House. "We have a very good debt-to-GDP situation… that can actually be held at the current ratio, which is quite good by international standards, while running a deficit."
On Thursday, Harper dismissed suggestions that the government should bring in more stimulus spending to counter the impact of lower oil prices.
"In terms of fiscal policy, the appropriate action is to make sure that as long as the economy continues to grow that we balance the budget," he told reporters.
Government insiders insist that's good policy.
"This is not just a political issue," a senior official told me on background. "Both the prime minister and the finance minister believe that running deficits, putting the country further into debt, is not good policy."
The political imperatives
Even so, the political imperatives when the country is just months away from an election can't be overstated.
High on that list would be trust.
The Conservatives have built a reputation as solid economic managers. Running a deficit now, particularly after rolling out income splitting, could undermine that reputation.
Worse perhaps, running a deficit, no matter how small, makes it difficult to position the Liberals and the NDP as reckless spenders for any election promises they may make,
Another concern would be international standing.
The Conservatives have always been quick to take credit for the fact Canada weathered the 2008 economic downturn better than other G7 countries.
Returning to balanced budgets is part of that, especially now that the International Monetary Fund and other forecasters predict the U.S. and Britain will enjoy stronger economic growth than Canada this year and next.
Then there is brand consistency. Balancing the budget is a core thread that binds Conservative MPs across the country.
This government remains doggedly convinced that it's also a core value with those middle-class voters now being wooed by both the New Democrats and Liberals who argue that the middle-class is feeling squeezed,
But there is at least one reason to refocus that approach.
Low oil prices are bad news for Alberta and Saskatchewan, the bedrocks of federal Conservative support, but they are shaping up as good news for Ontario and B.C. where the party needs to at least hold onto the gains it made in 2011.
In Ontario, the opposition parties insist targeted, stimulus spending is needed to boost the manufacturing sector, a message that may play well in those suburban ridings around Toronto, and in regions of southwestern Ontario particularly hard hit by plant closures.
Canada is facing difficult economic challenges. The government is facing tough political choices heading into an election. And for Harper, the answers so far suggest the trained economist will trust his political instincts.