The politics of austerity

Don Pittis has been a Fuller Brush man, a forest fire fighter and an Arctic ranger before discovering journalism. He was principal business reporter for Radio Television Hong Kong before the handover to China and has produced and reported for CBC and BBC New. He is currently senior producer at CBC's Business Unit.

Ah, Austerity, there's nothing like it. It's the new panacea. U.S. President Barack Obama is talking about it. So's China. The Europeans are actually doing it, though so far they seem to prefer imposing it on their poorest neighbours first, as an experiment.

Here in Canada at budget time, austerity is on the lips of every federal and provincial finance minister.

Grim-faced, determined. "We don't want it, but we need it," they say.

It fits into the same category as cold showers, long brisk walks, fasting, and Rolfing — a kind of brutal massage given by large Swedish women. It hurts, so it must be good for you.

Having been raised by Presbyterians and Methodists, personally I don't mind the idea of being austere. Besides being morally stimulating, I think it has economic and social value. And the scientists back me up. Frugality and deferred gratification have been shown repeatedly to be good for an individual's economic well being.

If you don't believe me, check out the cute kids in the Stanford marshmallow experiment. Kids as young as four who choke down the marshmallow right away instead of delaying for a greater reward are doomed. They just don't do so well in later life.

When you think of credit card debt as the adult version of the marshmallow experiment, that makes a lot of sense.

And maybe it doesn't just apply to personal finances. Even as a society, a move to the Presbyterian kind of self denial may not be a bad thing, at least for a while.

The philosopher Max Weber certainly believed in it, crediting the Puritan work ethic as the engine for Euro-American capital accumulation.

Maybe Max was right. Having enjoyed the high life for a few decades, maybe we need a patch of hard work and frugality.

But I'm not sure that is what our politicians are up to.

Certainly the fearful example of Greece is helping to concentrate certain politicians' minds, which, as I have discussed before, is better than the alternative.

That said, national or provincial budgets are not the same as spending by households. If the adult marshmallow eaters amongst us go on a credit card spending spree, that is money we will never see again. We may still be paying back long after the shoes are out of style and the iPad embarrassingly retro.

Government spending is quite different. Money spent on teachers, say, or social services, or road building, does not disappear from the economy. A little may leak out of the country as foreign holidays or foreign built machinery, but since Canada sells more that it buys from the world, that's not really a problem. It stays and circulates, being taxed and re-taxed as if flows through the economy.

Finance Minister Jim Flaherty arrives to deliver the federal budget in the House of Common June 6, 2011. (Adrian Wyld/The Canadian Press)

One more advantage for governments. Unlike you and your credit card, Canada pays about 2 per cent for the money it borrows, as opposed to your 19 per cent.

So when a government decides to move from stimulus to anti-stimulus, it better be sure it's worth the price.

One of the prices can be a general depression of the economy.

If everyone gets the same idea at the same time the cumulative impact may be even worse than anyone realized. You, inspired by thoughts of a Swedish massage, buy fewer iPads, shoes and cars. Municipal, provincial and federal governments, inspired by Greece, reduce their spending on jobs and social programs. That, combined with a global trend to austerity, could mean another recession.

There are two more political dimensions to the current talk of austerity that makes the government kind unlike the Pesbyterian frugality mentioned above.

The banner of austerity can disguise other motivations. Saskatchewan, for example, rolling in dough, is cutting arts funding. Another difference is that the frugality is not one proposed and accepted by the individual seeking austerity, nor is it distributed evenly. Some get a cut imposed, while others are even more prosperous.

If we really wanted to accept the Puritan kind of austerity, accept it as a society, share its hardship and take a good Rolfing, there is a kind of austerity that only governments can impose — with the stroke of a pen. That is the cold shower, the bitter medicine, of an across-the-board one-time tax increase to wipe out the debt. Such a sharp short shock, followed by a sharp rebound could well be better economic solution than years of painful contraction.

Currently most politicians fear tax increases more than they fear the backlash from cuts. But that may be changing. The Los Angeles Times reports that two-thirds of Californians support a plan to raise taxes. And everyone knows Californians are trendsetters.

There is another saving grace coming from south of the border that may soften the impact of Canadian austerity. Although Mr. Obama and his friends may be mouthing the words, the G20 Toronto Declaration agreed right across the road from where I am sitting, does not require governments to start reining in their debts until 2013, after the U.S. presidential election.

As Obama knows, and as Prime Minister Stephen Harper knows too, austerity may be sold as a painful necessity at other times, but never during an election when somehow, there's always money to spend.

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Flaherty tries to calm pre-budget concerns

Finance Minister Jim Flaherty tried to allay worries that the federal budget he'll bring down Thursday will translate into severe service cuts.

When asked whether reports of $7 billion in spending cuts were on the mark, Flaherty said the cuts would be "moderate, modest," but would not be more specific.

He said his budget would not be as "draconian" as the ones the Liberals brought down in the mid-1990s. "Reducing spending in the provinces for health care, for education, for social services — we're not touching any of that," he told reporters while trying on a traditional new pair of budget shoes Wednesday. "The majority of the spending review reductions relate to back-office operations in government. They don't relate to service delivery by government."

The CBC's Chris Hall reported on Power & Politics some details of the budget Flaherty will table Thursday:

The budget's theme is "jobs, growth and long-term prosperity."Spending cuts will be closer to $4 billion – or five per cent of spending – than to the $8 billion target previously floated.The budget will detail how much each department will be cutting, but will not include details of the specific programs that will be cut.It will set out ways to reduce the cost of public service pensions, with a number of options available to bring them more in line with the private sector by increasing the amount employees pay.

Some details of spending cuts were already revealed on Wednesday by the Board of Internal Economy, the governing body of the House of Commons. It issued a memo to all MPs telling them the budget for the House of Commons is being slashed by $30.3 million, or 6.9 per cent of the total budget.

The cuts will be phased in and fully implemented by 2014 - 2015.

The office budgets for MPs will be cut by a total of $627,000 per year, for eventual savings of $2 million; a fund for office furniture in local constituency offices is being scrapped and other changes are being made to travel rules that are designed to save money.

Ottawa has asked federal departments and agencies to come up with budget-saving scenarios of five per cent and 10 per cent, which could mean up to $8 billion in cuts to programs and services, leading to nervousness about how some Canadians might feel the pinch.

The budget is expected to contain precious few details about precisely which jobs and programs will be lost, meaning Canadians won't know the full effects for several months. Some are warning that the spending blueprint will harm services and put the public at risk, while others, including Flaherty himself, are insisting that the austerity will not be painful.

Glen Hodgson, chief economist at the Conference Board of Canada, expects most of the cuts to be in the government's administrative ranks and to unpopular programs rather than front-line services.

"I think in the near term what we're going to see is compression of the number of public servants, levels of employment, compensation models — a much smaller operating model for the core federal government. And then there will be a trickle-out effect for a lot of other programs."

However, Hodgson added, some of the budget's effects will simply be deferred. Changes to Old Age Security benefits, for example, are expected to be phased in over several years.

The budget is expected to lay out new policy directions, he said, that will ultimately change the government's role in the lives of Canadians.

In the short term, observers say, the federal deficit for the current fiscal year — which ends in three days — will likely come in far lower than the $31-billion estimate the government released in November. Royal Bank chief economist Craig Wright predicted earlier this week the deficit could shrink to the $20-billion to $25-billion range — enough to allow Ottawa to balance its books a year or two earlier than its current 2016-17 projection.

The opposition leaders have their doubts that the cuts will be judicious.

"This is going to be a government that's going to continue to cut," interim Liberal Leader Bob Rae said Wednesday, predicting cuts in environmental research, services and pensions. "This is a government that can't even mention the word 'inequality,' that can't mention the concept of the growing gap between those who have and those who don't."

Thomas Mulcair, the new NDP leader, says he has little confidence the government will show much restraint in its cuts.

"The whole pyramid of public administration exists to do one thing: to deliver a service to the public. That's the last thing you should touch. You should, if you have to do some paring down, go after the administration itself. So instead of going at it with a scalpel they'll go at it with a rusty machete, and I'm concerned we are going to lose a lot of public services."

Public service unions in Ottawa have pointed to recent cuts by the government as examples of how the budget could hurt Canadians.

Last spring the government announced it would close a marine rescue subcentre in St. John's and move services over a thousand kilometres away. Merv Wiseman, a search and rescue co-ordinator in St. John's, says the government didn't consult anyone before the move.

"This is the centre that has the highest rate of distress calls of anywhere in Canada.… It is a reckless decision that puts a price on the lives of people who have to work in the most volatile and hostile environment in the world," he said.

Recent job cuts at Service Canada also caused controversy when employment insurance cheques were delayed for months. Earlier this year the government backtracked and said it would rehire some of the staff.

Some experts say the government has learned from those mistakes and is unlikely to repeat them on a larger scale with the federal budget.

"They're going to do their level best to make sure the cuts aren't felt by Canadians across the country," says Ian Lee, a professor at Carleton University's Sprott School of Business.

He believes most of the cuts will be to administrative and policy staff who work largely behind the scenes — for example in government real estate, procurement or defence support.

"I think the cuts are going to fall disproportionately on the back office where they are not going to be seen or felt by the Canadian public."

Meanwhile, many public servants in Ottawa are bracing for staffing cuts, which may not arrive through relatively painless attrition or early retirement packages.

Andrew Graham, a professor in the school of policy studies at Queen's University in Kingston and a former assistant deputy minister at Agriculture Canada, doesn't think the government will be generous.

"Sweetening the deal is going to accelerate the departure of people you don't want to go," he said.

Graham said he's heard the federal job cuts will hit Ottawa hardest, since the centre has seen the biggest growth over the past few years.

With files from the CBC's Louise Elliott and Julie Ireton

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'Digital wallet' will transform smartphone, and how we spend

Digital wallets are on their way to replacing their leather counterparts for many Canadians within the next two years, according to retail and communications specialists.

One thing it could change, for example, is your morning coffee ritual.

David Robinson, vice-president of emerging communications at Rogers, envisions a Tim Hortons application that would know you always order a large double-double, track your location via GPS and charge your bank account before you’ve even set eyes on the restaurant.

"Then," says Robinson, "you just pick it up in an express window."

The smartphone-enabled wallet also allows consumers to purchase items simply by tapping their phone on a pad at the cash, much like a tap-and-pay credit card.

Those cards only deal in transactions, but the possibilities for digital wallets could be endless.

Big players such as Rogers, Visa and PayPal are backing the new technology, signaling its rise in the near future.

The list of digital wallet capabilities is long.

'Every carrier and bank on the planet wants to be able to do this.'

—David Robinson, vice-president of emerging communications at Rogers

New to the city and need a transit pass? You could simply purchase a pass on your phone and go. Access cards for your office building could be there, too.

Receipts would be stored in the phone, and so alleviate many of the headaches of the return line.

The way consumers buy alcohol or cigarettes would also change, as patrons could simply tap their phone on a pad at the cash to indicate their age to a clerk.

It could even bring sweeping change to the way health-care identification works, as provincial health cards could reside on a phone in the same wallet.

Test results could be emailed or explained to patients over the phone, eliminating many types of follow-up visits.

Stolen, copied or forged plastic health cards would be a thing of the past.

The digital wallet is a virtual representation of the real thing – except it resides in a digital device.

A wireless signal known as near field communication (NFC) is at the heart of the innovation, where a chip in the device sends a signal from the phone to a payment terminal.

Robinson says Canada is uniquely ready for digital wallets because the infrastructure is more developed here than in most countries.

As well, Canadians are in the top four in the world for smartphone usage and often have the latest and greatest devices.

Mobile payments and digital wallets are top of the development heap, says Visa Canada's Derek Colfer.

"There's lots of conversations occurring between mobile network operators, device manufacturers and banks," Colfer says. "There will be a plethora of digital wallets for consumers to choose from within the next 24 months."

Visa believes that once the retail backbone is established the rest will follow.

Rogers' Robinson says that in a few years digital wallets will be as common as a camera is on a cellphone today. "Every carrier and bank on the planet wants to be able to do this," he says.

Still, according to a report in December 2011 by the Task Force for the Payment Systems Review, Canada is still not yet where it needs to be for digital payments.

The review, commissioned by Finance Minister Jim Flaherty, says that Canada has not yet implemented a digital authentication process that is both safe and easy to use — something that industry players are pushing to rectify.

The review also states that Canadians rely too heavily on cheques, and that financial institutions could save $600 million a year in cost savings by 2020 under a digital payments system.

The seeds of digital wallets have been sown already — Google and PayPal have versions set up for payment. Visa’s digital wallet works on some LG, Samsung and BlackBerry phones for direct payment, including the BlackBerry Bold 9900 and 9790 models, as well as the Curve 9360 and 9380.

Robinson says RIM is the most aggressive but many handset manufacturers are developing the technology.

Other phones that are already NFC-capable include the LG Optimus LTE, the HTC Ruby, and Samsung's Galaxy S II.

Apple is curiously absent from the list – but many expect the company to include the feature on its next phones.

"Apple is very aggressive in patents in the category," Robinson says. "They've filed all sorts of patents around NFC. So looking at that would indicate that they're going to do something."

Every developer says security is a huge issue for consumers.

Research conducted for PayPal Canada found that 43 per cent of people don't trust their smartphone to keep their personal information secure, and more than 80 per cent worry about financial privacy while making mobile transactions.

But the developers of digital wallets believe they will be even more secure than traditional ones.

"If there is a transaction that occurs on an e-commerce site that you didn't make, you will not pay for it," says Colfer.

And no need to panic and call a dozen card issuers if your digital wallet is lost.

"One of the services we'll provide as carriers is we'll inform all issuers simultaneously that the cards have been compromised, and then issuers will be able to lock those accounts," Robinson says.

Then, new phone in hand, a person could piece their wallet back together just tapping on a screen and making some phone calls from an NFC-capable device – a much quicker ordeal.

Smartphone providers won't have detailed credit card information. Instead, they'll have a record that an account exists on a particular device.

"When we put a card in secure memory, no one has access to that information other than the issuers," Robinson says.

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U.S. calls for comment on Atlantic offshore exploration

The U.S. Interior Department said Wednesday it is seeking comment from the public on a plan to allow energy companies to begin seismic testing to find oil and natural reserves in the Atlantic Ocean.

Officials have released a programmatic environmental impact statement on seismic testing for public review. The testing would be used to determine how much oil and natural gas is available and where the best places to drill would be, among other things. The studies also help identify archaeological and geologic hazards to avoid.

Companies would use the information to determine where to apply for energy leases, although no leases are currently available in the region that could be opened up for exploration until 2017.

Supporters of drilling argued that there needs to be a plan in place soon to sell drilling leases to make the seismic testing valuable. Environmental groups said seismic testing could harm wildlife, even before any drilling begins.

"Without an Atlantic coast lease sale in their five-year plan, the administration's wishful thinking on seismic research has no ultimate purpose," the American Petroleum Institute Upstream Director Erik Milito said in a statement.

The announcement comes as Americans grumble about escalating gas prices and the Obama administration seeks to fend off criticism from Republicans that not enough is being done to tap domestic energy resources.

"As the president has said, there is no silver bullet to high gas prices. But we must continue to reduce our reliance on foreign oil and reduce our vulnerability to the ups and downs of the international market," Interior Secretary Ken Salazar said at a news conference in Virginia, a key election state.

Salazar said he would make his ruling on whether to allow seismic testing by the end of the year, following a series of public meetings from Delaware to Florida, where the testing would occur. Salazar said six companies have already filed applications expressing interest in conducting seismic testing.

The possibility of oil exploration in the Atlantic drew immediate criticism from environmental groups, who are concerned about its effects on marine life, including endangered whales.

"Today's announcement is great for petroleum companies, but horrible news for our coastlines and a potentially deadly blow to ocean fisheries and wildlife," Natural Resources Defence Council President Frances Beinecke said in a statement.

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India endorses BRICS bank

India's prime minister said Thursday that international institutions are failing to lift up the developing world and endorsed the creation of a new development bank to be run by five fast-rising nations.

Prime Minister Manmohan Singh spoke at a summit of the so called BRICS group — comprised of Brazil, Russia, India, China and South Africa — aimed at harnessing the nations' increasing global clout and forging stronger ties between their fast-growing economies.

The five countries represent 45 per cent of the world's population, a quarter of its land mass and a quarter of its economy at $13.5 trillion US.

Though the group has accomplished little of note at its three previous meetings, Brazilian President Dilma Rousseff insisted in an opinion piece in the Times of India that it had changed "the axis of international politics."

At the summit, the five nations are expected to agree to do more business with each other in their local currencies, to help insulate from U.S. dollar fluctuations while lifting trade within the bloc from last year's $230 billion to $500 billion by 2015.

They also hoped to move closer to creating a new development bank, much like the World Bank and Asian Development Bank, saying it would streamline efforts to raise capital in poor nations and facilitate more business among themselves.

Institutions of global political and economic governance created more than six decades ago have not kept pace with the changing world," Singh told the summit.

In response, the five nations are working to set up a bank funded and managed by them that would improve poor nations' access to development funds and boost emerging economies, Singh said.

"Developing countries need access to capital," he said.

The summit came as the Indian capital remained under a heavy security umbrella since a Tibetan exile lit himself on fire at an anti-China protest Monday. He died from his burns Wednesday.

Chinese President Hu Jintao's hotel was under virtual lock down, while Tibetan neighborhoods were sealed, with police allowing people out only for medical or court appointments.

Hundreds of police manned barricades along roads throughout the city, some carrying blankets soaked in water to quickly smother the flames of any protesters who try to set themselves alight.

Delhi police spokesman Rajan Bhagat said authorities had detained many Tibetan protesters in recent days, but would release most of them without charge in a few hours.

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Market awaits RIM results

Analysts are keeping their expectations low for Research In Motion's quarterly earnings this afternoon, noting RIM's international sales have been slowing and it will likely be months before consumers can get the new breed of BlackBerry.

RIM will release its fourth-quarter earnings after markets close at 4 p.m. ET with new CEO Thorsten Heins delivering the financial report, his first as the chief executive of the company based in Waterloo, Ont.

Heins took over from co-CEOs Jim Balsillie and Mike Lazaridis in late January amid shareholder unrest over the company's weak stock price and strategic direction.

Once a global leader in smartphone technology, RIM has been losing marketshare to Apple's iPhone and to smartphones with Google's Android operating system, especially Samsung phones.

The Canadian tech company isn't expected to release its BlackBerry 10 — the next-generation with a new operating system based on what's in RIM's PlayBook tablet computer — until later this year.

UBS analyst Phillip Huang says he expects another tough quarter for RIM, estimating the will have shipped 11.5 million smartphones and 375,000 PlayBook tablets in its fiscal fourth quarter.

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Maple syrup producers feeling pinch

Warm weather had maple sap flowing early this year, resulting in less syrup for many producers in Ontario, Quebec, Nova Scotia and New Brunswick.

The Ontario Maple Syrup Producers Association says producers in the province will have a multimillion-dollar loss due to output that's down at least 50 per cent in parts of the province.

But association president Ray Bonenberg says he doesn't expect the price of maple syrup to increase for consumers this year because the price went up slightly last year and it's set every couple of years.

In Quebec, maple syrup production has wrapped early up except for in the eastern part of the province and production is down in southern areas.

Quebec's maple syrup association has a three-year stockpile of syrup and its members can buy insurance to get them through a bad season.

Nova Scotia's maple producers association says production is expected to be down a bit due to the warm weather, and New Brunswick producers could also faces losses depending on the weather in the coming days.

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