OTTAWA – Canada’s parliamentary budget officer is casting doubt on the federal government’s rosy projections in the budget, saying the recession will likely be deeper than expected and Ottawa’s stimulus package smaller and less effective.
Kevin Page told a parliamentary committee Thursday the government’s claimed $39.9 billion stimulus package over two years is effectively about 20 per cent smaller, at $31.8 billion.
And he adds that a portion of the smaller amount may not find its way into the economy because $10 billion is contingent on shared spending by other levels of government.
The difference will mean the extra spending is unlikely to create or save the 190,000 jobs projected by Finance Minister Jim Flaherty, Page said, estimating the number at closer to 120,000.
Liberal finance critic John McCallum called the discrepancies and the expectations of a more severe downturn alarming, adding that the government may have to raise its stimulus spending within the next few months.
He noted that the TD Bank is now forecasting 325,000 jobs will disappear this year on top of the 84,000 that were lost in the last two months of 2008 as the recession took hold.
“The point is that the economy may need more fiscal stimulus sooner rather than later and we may not want to wait until the fall economic update of November 2009,” he said.
McCallum said his Liberals still did the right thing in voting for the budget because it contains many helpful measures, but he added “there’s still time” to bring in additional stimulus before the summer break if necessary.
But the NDP’s Thomas Mulcair said Page’s assessment of the budget numbers confirms that the budget’s claim the stimulus will boost economic growth by 1.9 per cent “is a pure mirage.”
Page’s overall analysis of the budget is that while it adequately takes into account the downside risks for the first year, it is overly rosy about the economy’s ability to bounce back, government revenues and forecasts of only four years of deficits.
He notes that the budget anticipates the current slump will be milder than the recessions of the early 1980s and 1990s, when the unemployment rate was far higher than the current 6.6 per cent.
“In terms of a cumulative amount in unrealized output, (our) analysis suggests that this projected economic downturn may already by more severe than either the last two recessions,” he said.
In the early ’80s recession, the jobless rate hit 13 per cent, while the recession of 1991-93 saw unemployment top 11 per cent.
Page also argues that the government is unrealistically counting on revenues from corporate taxes to rebound more quickly than is likely, which would mean Ottawa may remain in deficit longer than four years.
The budget officer’s analysis is in the same vein as several private sector economists in expecting the deficit to last longer. Earlier this week, IHS-Global Insight’s Dale Orr said a more reasonable estimate is for six more years of red ink.
A key reason for Page’s view that the stimulus is actually smaller than advertised is the fact that it carries forward $8.7 billion in projected asset sales and departmental cuts introduced in last November’s failed economic update.
If carried through, says Page, they would act as a drag on growth undercutting the stimulus elements of the budget.
“Adjusting for restraint measures proposed in 2008 economic statement and contribution to stimulus associated with maintaining current (employment insurance) premium rates, the public budget office estimated that the total net stimulus could be about 20 per cent smaller, $31.8 billion, than reported in budget 2009,” Page said.
The budget officer came under some stiff questioning from Conservative members of the committee, who questioned his methodology and whether his analysis can be trusted.
“When you try to forecast the comportment of humans, you can (make) mistakes,” said Tory MP Maxime Bernier. “That’s why these forecasts are not so accurate.”
Page agreed that there is great uncertainty about what will happen to the economy.
Given the “significant uncertainty,” he questioned whether Flaherty had factored in enough downside risk in the budget assumptions.