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Hooray for Stupid!

Today, Canada's Conservative government officially unveiled their budget to Parliament and the public (.pdf); the highlight of which is the promise of slightly over $16 billion(cdn) in tax cuts, including a 1% reduction in the level of the federal sales tax. While this may seem like A Good Thing to some, if one considers the current economic climate the new budget represents an incredibly ill-concieved bit of economic ideology. Given that the Canadian dollar is being pushed towards a steady appreciation of value which has seen its relative price achieve $.90xx(usd) against the American currency, and that banks such as the CIBC are forecasting steadily rising oil prices that will break the $90/barrel(usd) barrier sometime next year, the Conservative budget risks pushing the Canadian economy into a recession.

Why is this the case? Simply put, the high value of the Canadian dollar has the effect of making domestic exports more expensive for foreign buyers, which means that non-essential goods - particularly manufacturing goods, tourism, luxury products - become much less enticing. Even some essentials, such as agricultural produce, can be expected to take a hit as they are easily replaced by importing from less expensive markets. The lone, standout exceptions to this trend are products derived from the oil-industry - primarily crude oil, and natural gas - which are in scarce supply relative to demand. This also has the potential to affect Canada's booming technical-support and telemarketing industries, which have benifited greatly from the fact that American companies could pay signigantly less to have such services provided from Canada by virtue of the difference in currency valuations.

The end potential of this state of affairs is a serious drop in demand for goods and services produced in Canada, tied to a demand for Canadian currency that is intimately tied to oil exports, and an unsteady American economy. Under standard economic practice, the solution to mitigating the problem would be to increase government spending, thereby offsetting a drop in foreign purchases with an increase in govenment procurement. Rather than following this golden rule, the gov't of Prime-Minister Harper has chosen to (promise to) cut federal taxes sharply - perhaps not realizing that citizens without jobs don't make enough money to pay taxes.

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