Two very different approaches to national deficits By Harry Sterling Published March 17, 2010

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The one is confronted by massive street protests and violence but insists his government's stringent austerity measures are the only option to avoid economic chaos and instability.

The other, with an air of imperturbable confidence, assures his fellow citizens that the country's $54-billion deficit can be erased in four short years with some judicious cost-cutting, obviating the need for more drastic action.

Clearly, the seemingly doomsday approach of Greek Prime Minister George Papandreou is markedly more alarmist than that of the soothing confidence expressed by Canadian Finance Minister Jim Flaherty, who is assuring his countrymen the nation's $54-billion deficit will all but be eliminated by 2014 via carefully calibrated cuts in government programs and public service wage freezes.

While Canada and Greece obviously share a common desire to deal with their current fiscal and economic difficulties, each faces a set of challenges unique to itself.

For Greece, it confronts a staggering $419-

billion (US) debt and needs to raise about $27 billion right away on the bond market to cover debt maturing in April and May. Although Papandreou has said his government is not asking fellow European Union members for financial assistance, Athens reportedly hopes EU governments will facilitate lower interest rates on new loans and provide loan guarantees. Germany and France would take the lead in aiding Greece, though such assistance is highly unpopular amongst Germans, especially since bailing out EU debtors is not supposed to be allowed.

Unlike Canada, Greece's present difficulties have serious implications extending beyond its borders, with potentially negative consequences for many EU nations, as well as for the future of the Euro currency, which some speculators are already placing under attack. (Papandreou described such speculation as a form of "terrorism.")

Some see Greece's plight as representing a potential turning point for the eurozone, even leading to problems in EU states like Spain, Portugal, Ireland and Italy.

To his credit, Prime Minister Papandreou—only in power since October 2009—has initiated a number of austerity measures to bring down Greece's whopping deficit, which represents 12.5 per cent of the country's GDP. Greece's debt is 112.6 per cent of GDP, only exceeded by Italy's 114.6 per cent.

Athens has committed itself to reduce its deficit to 8.7 per cent by the end of this year. Incredibly, the government intends to cut the deficit to three per cent by 2012, a figure most would consider near impossible without the implementation of drastic government cutbacks.

Unlike the Harper government, Athens proposes to increase Value Added Tax rates from 4.5 per cent, 9 per cent and 19 per cent to five per cent, 10 per cent and 21 per cent, respectively. Excise tax would be increased on petrol and diesel fuel (from 63 per cent to 65 per cent) and 20 per cent for cigarette and alcohol. Excise taxes for industrial and household electric consumption will also increase.

Announcements concerning reductions in public sector wages (reduced by seven per cent) and pensions unleashed massive protest marches, followed by widespread violence.

The government says it will also adopt new legislation reforming the tax system—with higher tax rates for the wealthy—and greater effort in dealing with tax evasion.

In contrast, the Harper government has adopted a much more steady-as-she-goes approach to Canada's own large deficit and long-term debt.

Finance Minister Flaherty insists there won't be any increase in the GST and soft-pedals on speculation that additional major cutbacks in public spending are imminent. The deficit supposedly will be brought down through an anticipated upswing in the economy, increased employment and growth in government revenue. In sum, Mr. Flaherty paints a relatively positive picture concerning an expected recovery for the Canadian economy.

Perhaps too rosy in the minds of some. For one thing, Ottawa's prescription for Canada's economic recovery seems remarkably oblivious of the outside world's role in any country's economic fortunes.

This is particularly pertinent in the case of Canadian exports. Although Canada's reliance on exports to the crucially important United States market has declined in recent years in percentage terms from the previous high '80s to the mid-'70s, the American market remains critical for Canadian exporters and job creation.

This is particularly relevant for Canada's forest industry and certain manufacturing sectors. The current malaise in the US housing market has serious implications for Canada, as does the present American unemployment rate of over 11 per cent, much higher than Canada's eight-plus per cent, an historical anomaly.

While trade and economic growth in East Asia countries has encouraged many to see that region once again playing a positive role in promoting global trade, China acting as a major growth engine, even China may encounter some problems if its overheated real estate bubble suddenly explodes as happened in Japan in the 1980s. Because of the ongoing difficulties of Toyota, Japan itself may also have some rough days ahead; its new government is already showing signs of floundering.

According to an OECD report, governments should cut social spending as a general tool to reduce government debt.

The question for Canadian taxpayers—and voters—is straightforward: Is Finance Minister Flaherty's upbeat assurances about tackling the enormous deficit realistic? After all, this is the same politician who inherited a large surplus from the previous Liberal government and said there would be no deficit under his watch. He also dismissed the idea Canada would slide into a full-blown recession. And yet...

Interestingly, even if the economic situation in Canada does not improve significantly, and the deficit remains a serious problem, it could provide the Harper government with the possibility of imposing more draconian cuts in government expenditures, an objective many in the Conservative Party would likely welcome in their visceral antipathy towards big government.

Harry Sterling, a former diplomat, is an Ottawa-based commentator.

editor@embassymag.ca