Monday, August 24, 2009

What is Political and What is Important

The challenge for any elected official, especially one with a key portfolio, is separating what is political from what is important. Last week, Federal Finance Minister Jim Flaherty welcomed an eclectic group of Canadians to Meech Lake to help him do just that. Investment professionals, policy experts and entrepreneurs prioritized the nation’s problems and opportunities, from budget deficits to trade and beyond. Flaherty hoped to consult with Canada’s best and brightest, but one of them must have declined because I was invited, too.

Some issues that came in for discussion would seem beyond the purview of the Finance Department. But as other ministers inevitably request budget dollars to fund their priorities, Flaherty, or any Finance Minister, must exercise judgment on a plethora of concerns. Information and opinions abound. The trick is to determine what is germane and actionable. Two examples of matters that encroached on talk of dollars and cents were the environment and health care.

In the former case, there is an exhausting tendency in policy circles to couch every topic in terms of environmentalist dogma, no matter how tenuous the connection. Anyone familiar with this tic will appreciate that an otherwise cogent debate on Canadian pensions can quickly devolve to whether raising RRSP contribution limits will anger Gaia the Earth Mother. But issues like climate change do, in fact, hold real and immediate ramifications for the nation’s finances, especially in the area of trade.

The growing trend of “Green Protectionism” sees countries that enact environmental regulation adding duties to imports from nations that do not have the same Earth-centric standards. Owing to free trade agreements and economic reality, organized labour and other traditional tariff proponents cannot attain trade barriers overtly but, if they are able to achieve similar ends while wrapping themselves in the mantle of climate sanctimony, more the better. Such provisions are evident in America’s erstwhile “cap-and-trade” legislation which, though it may go no farther than the House of Representatives, provides a case study in this coupling of protectionism and piety.

Sagely, Flaherty sought insight on the state of this issue. Expanding Canada’s trade markets, while preserving the free trade relationships we have, is crucial to maintaining Canada’s economic strength, and understanding environmental policy is part of that task.

With an aging population, health care expenditures, particularly in the form of federal transfer payments to fund this provincial mandate, must factor into the Finance Minister’s calculus. Health care is perhaps Canada’s most contentious political issue, but with an unsustainable cost structure looming as baby-boomers enter their dotage, sober discussion cannot be delayed much longer. There was debate as to whether transfer payments should be increased, cut or eliminated to make room for private sector solutions. Folks could agree, however, that Flaherty will not be the last Finance Minister confronted by these questions. Over imminent years, political will and courage must be summoned and sustained to face this challenge.

In the field of finance proper, budget deficits can be both political and important. Oftentimes, when a government runs a deficit, its chief function is as a hobbyhorse for the opposition. “We left you nincompoops with balanced books and now look!” screams the finance critic of an ousted party anytime expenditures exceed revenues, no matter how marginally. This is the political factor. The important aspects to a budget deficit are the reasons it exists, the length of time it is sustained, and its size as a percentage of Gross Domestic Product. At 3.3% of the nation’s GDP, Canada’s deficit is relatively small (despite its ominous $50 billion appearance), especially when contrasted with the 13% of GDP shortfall currently hobbling the United States.

Even so, Flaherty understands the importance of getting the nation out of deficit and, in case he harboured any doubts, this priority was reinforced in the strongest terms by his invited interlocutors. The Finance Minister has announced a plan to return to surplus by 2014 and he was urged not to neglect that goal. As budget items are entrenched and spending is less discretionary, a deficit can become inescapable and structural. To wit, once a government begins running deficits, it becomes increasingly difficult to stop. Conservative and Liberal governments have reduced Canada’s debt in recent years, and no one wants to see that progress reversed by habitually spending more than we make.

But Flaherty remains fretful for the goliath and growing budget deficit south of the border. Projected at $9 trillion over the next decade, it seems a matter of time before America’s spending overruns call the country’s creditworthiness into question. And the Finance Minister is not the only one who’s noticed. On his recent trip to China, a major creditor to the United States, Flaherty was gratified to learn that the Asian nation wishes to take its relationship with Canada to a higher level. It is unfortunate, though, that these overtures are partially prompted by Chinese concerns about our neighbour. The Canada-US trade relationship is the largest in the world, and no ancillary benefit of new markets can eclipse its importance. America must get its books in order, though there is precious little Flaherty can do about it. In this way, the matter is important without being especially political.

Flaherty thanked his guests in words of Canada’s first Prime Minister, Sir John A. Macdonald, appropriate to a great nation in a challenging time: “Look a little ahead, my friends.”

Theo Caldwell is the author of Finn the half-Great.