This is a post from Alex Carrick's blog that covers the Canadian construction industry.

Since 1985, Mr. Carrick has held the position of Canadian Chief Economist with Reed Construction Data's CanaData, the leading supplier of statistics and forecasting information for the Canadian construction industry.

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Notes from Alex Carrick - Apr 03, 2012

Alex Carrick
A Tale of Two Budgets

“Austerity” has been adopted as the current buzz word by governments.

It has taken precedence in public sector thinking due to the example of Europe, where the debt problems of Greece, Italy, Ireland, Portugal and Spain have nearly crippled the economy.

And also Washington, where there is gridlock in dealing with the Union’s finances.

Therefore, the Conservatives in Ottawa embraced austerity in their recent budget. There will spending cuts in various departments combined with staff reductions through attrition that will see the deficit eliminated in several years.

For Mr. Harper’s majority government, this is a happy confluence of circumstances since smaller government is part of the philosophical bent of the Conservative Party.

The financial restraint will continue to enhance Canada’s reputation internationally as a nation that is prudent in its fiscal dealings and behaves in a responsible way when dealing with debt.

To my way of thinking, however, the most commendable feature of the federal budget is its recognition of the changing nature of Canada’s economy. The country’s future will increasingly depend on selling our resources to emerging nations, as well as to our traditional trading partners, most notably the United States.

The fastest economic growth in the country will occur in the resource-rich West and parts of Atlantic Canada. That’s also where the largest population gains will continue to take place.

To aid this shift, Ottawa is planning changes to the approvals process for the largest resource investment projects. Regulatory reviews will be limited to two years and there will be only one public sector environmental study.

The federal government will hand over responsibility in this area to any province judged capable of carrying out the assessment in a comprehensive and professional manner.

In my opinion, this is the highlight of the federal budget.

Where I think the Conservatives may have stumbled – and I’m out of step with many other analysts in this regard – is in terms of the Old Age Security (OAS) timing change. 

Many commentators believe pushing back OAS eligibility from age 65 to 67 was a prudent move. Other countries are now expecting their citizens to retire later. Working longer is both achievable, given the better health of the elderly, and easier on the public purse.

But Ottawa’s finances are relatively healthy and at least one study has concluded that the OAS program is sustainable with the earlier threshold.

The change to OAS will sow seeds of discontent. Anyone presently aged 54 or younger – i.e., the cutoff point for the rule change - will be outraged by any new revelation of government waste.

Whenever the head of some obscure public-sector board or agency is “outed” as making hundreds of thousands of dollars, the “resentment meter” is sure to swing wildly to the right.

The dissidents will frame the problem as follows: someone else is gaining an advantage at my expense. (By the way, this isn’t a personal matter for me, since I’m well past the age of 54.)

The OAS provision, which seems reasonable given current economic sentiment in a post credit-crisis world, is likely to come back and bite the Conservatives at the next general election.

The effect will become more exaggerated as the economy continues to improve and some of Ottawa’s current spending resolve is relaxed in the years ahead, which is all but inevitable.

This brings us to Ontario’s budget. As a politician, how do you know when “austerity” has to be taken seriously?

The answer is quite simple. When a credit rating agency tells you so. When you’re threatened with a debt downgrade if you don’t take sufficient action to lower your deficit.

That’s the situation Ontario faced entering budget season. Premier Dalton McGuinty was fully cognizant of this fact. That’s why he preemptively appointed Don Drummond to find ways the province could cut spending.

Mr. Drummond did an excellent job, coming up with over three hundred specific suggestions.

That’s why it comes as a surprise that the Ontario budget is long on talk about restraint, but shorter on specifics. Many of the key recommendations in the Drummond report are ignored. Favorite programs of the governing Liberals (e.g., all-day kindergarten) have been left intact.

The professed billions of dollars in savings will come partly from not going ahead with the next and final stage of corporate tax cuts. And from getting tough with public sector workers in upcoming wage negotiations.

The Liberals have a credibility gap. Will they really be able to limit doctor and teacher salary gains to zero percent over the next couple of years? Can health care costs, which have been increasing almost uncontrollably for years, be realistically confined to a narrower trajectory?

Another factor working against Ontario’s budget is the minority status of the government, with the Liberals needing either Conservative or NDP support on ever major piece of legislation.

Ontario’s budget comes up wanting in one other important area – vision. Nor can the opposition parties claim that they have much greater clarity of purpose than the Liberals.

From comments earlier in this article about the rising resource provinces, it can be inferred that Ontario’s place within the confederation and the broader world is changing.

What should the people of Ontario be doing to ensure their prosperity? How do we hone our talents and natural strengths to best advantage? 

The following are three examples of steps Queen’s Park might try. 1) Adopt policies to promote Ontario’s own resource sector projects, especially in the north.

2) Promote measures and engage in consultation to help the province’s manufacturing sector more fully participate in “mega” resource sector projects in other parts of the country.

3) Position Ontario better within the total North American energy market. This would include alignment of projects in both electricity (hydro and nuclear) and fossil fuels (e.g., pipelines reversals to take oil to the U.S. and East Coast for trans-shipment to offshore customers.)

As a final note, the spending cuts at both levels of government will reduce construction activity to some degree. At the same time, both Ottawa and Queen’s Park have reaffirmed their commitment to infrastructure spending as a priority ahead of many other options.

There is recognition that new and upgraded capital assets will be essential to maintaining Canada’s competitive edge in a world where trade has become increasingly cutthroat.

Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News.


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Read Other Recent Alex Carrick Posts

05/14 - Economic Nuggets - May 15, 2012
05/11 - Canada Rode a Second Consecutive Month of Strong Job Gains in April
05/04 - U.S. Employment Rose by a Mediocre 115,000 in April
04/27 - U.S. GDP +2.2% in Q1 2012 and Alberta led Canadian Provinces in 2011
04/18 - U.S. Inflation Low in March; Canada’s Central Bank Looking to Raise Rates
04/12 - Canada’s Trade Surplus in February Declined but Business is Optimistic
03/29 - A strong year for new construction investment intentions in 2012
03/21 - Leading Indicator Series Add to Good News about the U.S. and Canadian Economies
03/06 - Three key trends, more forays into high-tech and the importance for construction
02/29 - Two important sources of strength: share prices and non-residential construction
02/22 - Home resale market may be picking up in the U.S. while flattening in Canada
02/16 - Good news on U.S. housing and employment is positive for Canada as well
02/08 - Home starts and job levels diverge in Canada and the U.S.
02/03 - Canada’s labour market flat in January but U.S. on a roll
01/23 - Canada’s leading indicator series continued to charge ahead in December
01/12 - 2012 holds promise but there’s no denying the uncertainty (part 2)
01/11 - 2012 holds promise but there’s no denying the uncertainty (part 1)
01/04 - How stock prices have performed depends on the timing of the data points
12/22 - Canada stands firmly in the middle of the road as it enters 2012
12/14 - Trade issues climb the agenda in both Canada and the U.S.

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