OTTAWA – Canadians are in for further deficit shocks once the reality of slow economic growth and higher unemployment during the recession is acknowledged by the federal government, economists say.
Finance Minister Jim Flaherty’s shocking announcement Tuesday that the federal deficit will be 50 per cent higher than predicted in January – to more than $50 billion – is only the start of the bad news for Canadians..
Although Flaherty said he is not revising his numbers beyond the current 2009-2010 fiscal year, economists said it is virtually impossible for Ottawa to meet its second year projection – for 2010-2011 – of a $30 billion deficit.
But Liberal Leader Michael Ignatieff said the finance minister has lost credibility and asked the prime minister to “fire” Flaherty. He noted that only weeks ago Flaherty had insisted he was not revising his budget estimates for the current fiscal year.
In his defence, Flaherty said the deficit is only about half as big relative to the economy as it was in the 1980s and 1990s, before the Liberal government of Jean Chretien cut spending and raised revenues to balance the books and run surpluses.
“The deficit is affordable, it’s necessary for Canada, we’re doing the right things now,” Flaherty said in the Commons.
But the minister refused to back off his projections that next year’s deficit will be about $30 billion and then fall off to $13 billion in 2011-2012.
Economists also believe Flaherty has been too optimistic in his financial projections not only for the current fiscal year, but going forward.
One glaring area of dispute is the budget’s projection that nominal gross national product – the value in current dollars of what Canadians produce – will grow by 4.3 per cent next year, and 6.4 per cent and 6.1 per cent in the following years.
The vast majority of forecasts, including from the International Monetary Fund, call for a much more muted rebound starting next year. Bank of Canada governor Mark Carney has also recently proclaimed that Canada is entering a period of slower growth potential, even after the recession ends.
“If Flaherty thinks this a one-year phenomenon, I doubt that very much,” said Dale Orr, an independent economic consultant in Toronto.
Flaherty explained that the government’s multibillion-dollar bailout of the battered auto sector will be a one-time payout that only impacts the deficit this year. He did not say how much Ottawa will contribute to rescue struggling General Motors (NYSE:GM) and Chrysler, but estimates put the figure in the $10-billion range.
But Orr and other economists say the economic headwinds hitting the country now will squeeze the government’s books for several years.
Ottawa has only begun footing the unemployment benefits bill for the 321,000 Canadians who have lost their jobs since October, and the hundreds of thousands more who will be laid off in the next year or longer.
That not only squeezes personal taxes paid to government, goods and services tax receipts, but also adds hundreds of millions or billions of dollars to employment insurance payments.
As well, the government will take a “hit” on corporate tax revenues for years to come, said TD Bank chief economist Don Drummond, a former senior finance department official and a leading expert on budget-making.
Drummond predicted it will be many years before the federal government again balances its budget.
“If they just allow a normal spending growth path of four-to-five per cent and don’t change their tax rates, we will not get to a balanced budget for many, many years,” he said.
To get to balanced budget in the four years still being forecast by Flaherty, the government would have to cut spending increases to almost zero, or the economy would have to take off into stratospheric growth rates.
“It’s easier to dramatically cut spending than it is to a low positive growth rate,” he explained.”If you look at history, either at the federal or provincial government, you will not find any sustained period where any government has run program spending (at low growth rates) for a sustained number of years.”
The Canadian Taxpayers Federation said that when all the numbers are finally tabulated, it is likely the federal government’s accumulated debt will rise by more than the $120 billion, wiping out more than a dozen years of debt repayment under both Liberal and Conservative governments, returning the country’s national debt to close to $600 billion.
That means Canadians will be paying higher debt service charges, but it also means Ottawa is likely through with meaningful tax cuts, or expanded social programs for many years to come.
The economists say Flaherty is correct on one score – that Canada’s deficit problems pale to what they were two decades ago, or to those of other industrialized countries.
This year’s deficit represents about three per cent of the size of the country’s economy of more than $1.5 trillion. By comparison, the United Kingdom has tabled a deficit equivalent of 10 per cent of their gross domestic product, while Washington’s US$1.75 trillion shortfall is 12 per cent of GDP.
As well, Canada’s debt to GDP remains among the lowest of industrialized nations and is less than half what it was when then finance minister Paul Martin vowed to eliminate the deficit “come hell or high water” in the mid-1990s.
