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Domestic Budget with Flexibility to Respond to International Events

Friday, January 30, 2009 > 11:05:02
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(Embassy – via I.E. Canada)
By John Curtis

The federal budget presented yesterday by Finance Minister Jim Flaherty attempts to balance the short-term need to help Canadian families, regions, and sectors and the longer-term objective of taking advantage of the crisis to lay the foundation for a more competitive, greener economy in the future.

The budget is set in the context of, as it states, a "synchronized" global recession, the effects of which have come to Canada later than other countries and had a "shallower" impact.

But the uncertainty of the current situation is made clear, and the possibility of further contingency measures is hinted at if developments abroad—or in
Canada—get worse.

The finance minister, therefore, has chosen in this highly economistic document to do just enough—belatedly, according to some, too much, according to others—to meet his government's political requirements as well as Canada's commitments made at November's G-20 meeting in Washington. At that time, all assembled countries agreed to stimulate, wherever circumstances permitted, their economies by two per cent of their respective GDPs.

The budget makes it clear that the economic situation in Canada and abroad has deteriorated sharply since the government's ill-received November Economic and Financial Statement.It accepts the judgments of international agencies and private sector economists' that Canada has seen declining economic activity since the fourth quarter of 2008, and builds much of its spending and tax proposals on estimates of economic activity that are even lower than currently accepted.

It intimates, but doesn't highlight, the fact that the
U.S., Canada's neighbour and dominant economic and trading partner, is in the early stages of a major economic meltdown where household, business, state, national and international debts will have to be reduced over the next two to three years. It acknowledges the continuing negative impact this will have on Canada and every other economy in the world, including the member states of the EU, China, India and other emerging as well as less- and least-developed countries.

Should economic conditions in the U.S. continue to deteriorate as its deficits and debts are remedied over the next couple of years through belt-tightening and cultural/attitude changes, the severity of the potential impact on Canada is not addressed head-on in the budget document.

Nor is the opposite possibility—the confluence of positive economic developments occurring as early as mid-2009, to which the governor of the Bank of Canada, Mark Carney, recently alluded to—on the projected deficit and the Canadian economic situation spoken to. In this less likely case, some of the fiscal stimulus in this budget, and the accompanying monetary stimulus undertaken by the Bank of Canada since mid-summer 2008, could be reversed and the announced deficits reduced.

The central problem for all countries, including Canada, at present is the lack of demand, as opposed to the largely supply problems (oil, high interest rates, etc.) that characterized earlier recessions of the 1970s, 1980s, and 1990s. This lack of demand has been caused by a severe lack of confidence (unique to this recession), lower household incomes because of declining stock values and rising unemployment, falling profits, and other psychological and social factors.

As a major factor in spending in the economy, and with co-ordinated stimulus spending as part of the G-20 by all other major economies, the government, through this budget, is in effect supplementing lagging consumer and business spending and hoping to restore confidence and spending in the economy.

But the impact of all this government-based activity—and the fiscal deficit thereby incurred—is not clear. It is not a strongly reformist document—there are no firm proposals for strengthening international financial regulation, no suggestions about how Canada might see changes to the International Monetary Fund, or ideas about better managing the Canada-U.S. economic and trade relationship.

As well, there are no fresh ideas about updating international trade rules, or how to help the world's one to two billion poorest. It is a domestically-focussed, Canadian macro-economic document, which is appropriate for the times, but breaks very little new ground.

It advances necessary infrastructure measures, it helps those in this country in most need in these trying economic times, and leaves open the possibility of doing more or less as the uncertain and volatile world economic situation evolves through the coming months.

John Curtis is a distinguished fellow at the Centre for International Governance Innovation in
Waterloo, Ont. He retired from the Department of Foreign Affairs and International Trade in 2006 after serving in a variety of positions, including as chief economist and senior policy adviser. He also served as founding chair of APEC's economic committee from 1994-1998.
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