Financial Crisis in Canada Is Thesis

  • Length: 15 pages
  • Sources: 11
  • Subject: Economics
  • Type: Thesis
  • Paper: #4870867

Excerpt from Thesis :

The partisan politics seen south of the border would be impossible, because the resulting inaction would be viewed unfavorably by Canadians.

The financial crisis has damaged Canada economically, but it has also highlighted the value of financial conservatism. Canada's handling of the crisis has improved its standing in the world. The Canadian banking system has been lauded for its conservative nature. Further esteem has been brought to the government for its role in building a strong, stable banking system. Many economic observers have taken notice of Canada's successes and prescribed some of Canada's regulations as a future path for their own banking systems.

Aside from banking, Canada is now showing some signs of economic weakness. The country's relatively strength, however, has caused the government to take relatively little action on the crisis. This has not enhanced Canada's international standing, but it has not hurt it either. Canada has not needed to take on a leadership role, and the government remains committed to sorting out the nation's position in Afghanistan above sorting out difficulties in the economy.

How Has the Canadian Government Handled the Crisis?

The late onset of the financial crisis in Canada, combined with an election where the crisis was not the primary focus, resulted in a delayed reaction on the part of politicians to the crisis. In the United States, the first step was a bailout of the banking sector in the wake of high profile bank failures. Canada's protected and highly-regulated banks had no need of a bailout. The second step in the U.S. was discussion of an automaker bailout, followed by the stimulus package and Fed response. In Canada, there is no Fed and the Bank of Canada does not have the same powers. There was, however, talk of an automaker bailout and in January a stimulus package was passed in the federal budget.

By late November, the Canadian government had still not made a strong move towards providing economic stimulus. Indeed, the economic statistics for October, heralding the beginning of recession in Canada, had barely been released. Thus, it was only in late November that the government first became subject to any palpable sense of urgency. The Finance Minister, Jim Flaherty, indicated in a traditional post-election economic update that a budget surplus was unlikely. The ever-opportunistic opposition parties pushed at that time for a stimulus package, but Flaherty deferred to the budget, due in late January

. This was necessary gamesmanship for a minority government. If the opposition parties were so intent on stimulus, they would need to cooperate with the Conservatives in the form of supporting the budget.

The delay was exacerbated by the fact that the House of Commons was scheduled to go on Christmas break from December 12 to January 26. Given that Prime Minister Harper had announced in a speech in Peru in November that the crisis was moving so quickly that governments did not have time to set out policy, the impending two-month delay on the part of his party was not met favorably

. The U.S. had already announced an $800 billion stimulus package and other industrialized nations were following suit, prompting criticism from the opposition

As early as November, the Canadian government had begun discussing the idea of an automaker bailout. The initial discussions surrounded the possibility of a joint Canada-U.S. bailout. As one of Canada's major export industries, automobile manufacturing accounts for some 400,000 jobs, mainly in Ontario. After the Bush administration offered a bailout to the automakers, both Canada and Ontario followed suit, in order to defend their jobs in the face of impending auto industry restructuring. The Canadian bailout accounted for roughly $4.27 billion

After the automaker bailout, the House of Commons adjourned for the holidays, picking up at the end of January with the passage of the budget, with the stimulus plan embedded. Harper's Conservatives are a right-wing party whose platform is built around economic and social conservatism. The centrist Liberal party also helped pass the budget, and they are built around economic conservatism and social liberalism. Thus, the budget contains strong elements of economic conservatism. Not only was the stimulus package relatively small, but it was based largely on supply-side initiatives, in stark contrast to the largely Keynesian stimulus package of the Obama administration.

Jim Flaherty's economic statement in late November had already indicated there would not be a major government spending spree, as he hoped that the budget would be balanced. While this would ultimately not come to pass, the stimulus package was widely criticized as being insufficient

. When the budget finally arrived, the minimalist nature of the stimulus package was evident. The total stimulus provided was $40 billion over five years.

The stimulus package/budget contained a wide variety of initiatives. These include tax relief, public works, housing projects, unemployment insurance, skills development and transitional support for struggling industries. The bulk of the stimulus, however, comes in the form of tax relief.

The tax relief component is estimated to be worth $20 billion over five years, the largest component of the stimulus package. Included is an increase in the basic personal amount and a raise in the ceiling of the bottom tax brackets. This provides a direct reduction in personal taxes for Canadians. This stimulus, however, does not take effect for the 2008 taxes, thus the effect of this stimulus will not be fully felt until the spring of 2010. Because the tax relief is spread over five years, it is estimated to contribute $4 billion per year, or approximately $125 per person per year

The tax program also contains other initiatives target at certain groups, some of whom are politically desirable demographics. Seniors for example receive a reduction in their taxes, which given that they are likely to spend the extra money can hardly be considered stimulus. But for a government that may be facing another election soon the move is certainly pragmatic. There will also be an increase to the child tax benefit, and to the working income tax benefit, targeted at workers transitioning into the workforce

In addition to the tax relief, some $12 billion was set aside for public works projects. This will include the following: $4 billion over two years in an Infrastructure Stimulus Fund. This will be portioned out to the provinces and used for a range of projects, including public transport, sewers, and neighborhood regeneration projects. There will be a $1 billion investment in a Green Infrastructure Fund over five years. For recreation facilities, $500 million will be provided

Housing projects will receive $1 billion over two years for energy retrofits of social housing; $400 for new social housing construction for seniors; $75 million for social housing for persons with disabilities; $400 million for social housing for First Nations; $200 million for social housing in the north

Employment insurance recipients will eligible to receive an extra five weeks' worth of benefits. Beyond that, the stimulus package will add $1 billion in training for EI recipients. Another $500 million will be provided to a Strategic Training Fund. A variety of minor training programs will receive amounts $100 million and below

The bulk of the response to the economic crisis does not come in the form of a stimulus package, however. An estimated $200 billion has been earmarked to support credit markets. This includes $50 billion to the Insured Mortgage Purchase Program, the Canadian corollary to Fannie Mae and Freddie Mac that purchases pools of mortgages

. This move was intended to short up liquidity, ensuring that credit remains available. The move also helps to insulate Canadian banks against the competitive advantage that foreign banks gain from being backed by their governments. Such backing -- as many major U.S. banks now have de facto -- lowers the cost of capital for those banks because it all but eliminates their default risk. Thus, Canadian banks required similar backing or otherwise would have had a higher cost of capital than foreign banks, reducing their competitiveness in the international market.

Two other programs received substantial funds under this initiative. $13 billion has been made available for loans via a variety of crown corporations. In addition, another $12 billion has been set aside to create the Canadian Secured Credit Facility, which will support the financing of vehicles for consumers and businesses

In addition to the financial initiatives, the Canadian government has responded to the crisis with a range of non-financial initiatives. These have generally taken the form of increased regulation. The Minister of Finance has been given additional authority to "promote financial stability and maintain efficient and well-functioning markets." The Canadian Deposit Insurance Corporation (CDIC) has been granted "greater flexibility to enhance its ability to safeguard financial stability." A "standby authority" has been created to allow the government to inject capital into the banking system. Furthermore, a new securities regulator will be created, essentially replacing the old…

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