Following Our Neighbor’s Lead

“Profit Confidential” Column, by Michael Lombardi, CFP, MBA

Yesterday, the Canadian government presented a deficit-fighting budget, which will lead to an almost balanced budget for Canada’s fiscal 2014-2015 year. Well before any of the Group of Seven (G7) countries, Canada plans to return to a budgetary balance over the medium term.

The plan?

Canada’s annual deficit is expected to fall by about half over the next two years, in 2011-12, then by two-thirds in 2012-13, and, by 2014-15, the government plans to be running only slightly in the red (very close to a balanced budget).

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How they will balance the budget without raising taxes:

First, temporary measures the Canadian government introduced to stimulate the economy during the global recession will be removed. Secondly, the government will introduce measures to restrict spending. For example, the salaries of the prime minister, members of parliament and cabinet ministers have been frozen. Finally, the government will conduct a review of government overhead costs to identify additional cost savings.

The result? Canada’s debt-to-GDP ratio will peak next year at 35.4% and fall to 31.9% by its 2014-15 fiscal year.

During the global recession, Canada’s economy was the least affected. Canadian banks came out unscathed from the crisis. Canadian real estate is still rising in price, while jobs were actually up in some months of 2009.

Why can’t we do the same thing in the United States?

Canada is a geographically larger country than the U.S. Its population at 35 million people is much less than the U.S. — so it has less people paying taxes. As a businessman that has run businesses in both the U.S. and Canada, I can tell you the Canadian system favors and helps small businesses over big business.

If we come to realize that 70% of all employment in the U.S. comes from small business, then why did the U.S. government bail out Wall Street and “too big to fail” corporations as opposed to small business? I get letters every day from my readers who are small business owners telling me that the government has done nothing during the recession to help their businesses keep the people they employ.

We need to take a step back as a country and follow our neighbor’s lead and show fiscal restraint. Otherwise, not only will our currency feel the wrath of a national deficit gone wild, but so will our children and their children.

Where the Market Stands:

The Dow Jones Industrial Average opens this morning only four points away from where it started in 2010. In other words, we are at about breakeven so far this year for the stock market in general. Individually, many stocks have been great performers so far in 2010.

In these pages this year, you have read how I believe interest rates that are at record lows and the most accommodative monetary policy I have seen in my business life will eventually bring the market higher. I continue with this opinion. Unlike the majority of my contemporaries that threw in the towel during early February of this year, I have continued with my belief that the bear market rally that started in March 2009 still has life left. Until proven otherwise, I have the same opinion today.

What He Said:

“Any way you look at it, the U.S. housing market is in for a real beating. As I have written before, in the late 1920s, the real estate market crashed first, the stock market second, and the economy third. This is the exact sequence of events I believe we are witnessing 80 years later.” Michael Lombardi in PROFIT CONFIDENTIAL, August 27, 2007. “As for the stock market, it continues along its merry way oblivious to what is happening to homebuyers’ wealth. (Since 2005 I have been writing about how the real estate bust would be bigger than the boom.) In 1927, the real estate market crashed and the stock market, even back then, continued along its merry way for two more years until it eventually crashed. History has a way of repeating itself.” Michael Lombardi in PROFIT CONFIDENTIAL, November 21, 2007. Dire predictions that came true.