OTTAWA – How quickly and strongly Canada’s economy rebounds from the worst slump in almost two decades could come down to a few lines in Tuesday’s federal budget and their execution, economists say.
Last week, Bank of Canada governor Mark Carney presented a rosy picture of the recovery with Canada bouncing back strongly next year.
But Carney had a significant caveat. He was assuming massive and effective stimulus in the United Sates and in Canada to make his sunny prediction work.
All indicators, particularly the Canadian government’s own projection of $64 billion in deficits over the next two fiscal years, point to massive stimulus, likely split between spending and tax cuts.
“No single move is perfect, no single move does everything economists want it to do, so maybe the best plan is to sprinkle it among a couple of different areas and that’s what it looks like they will do between infrastructure, worker retraining and some kind of tax relief,” said Douglas Porter, deputy chief economist with BMO Capital Markets.
Based on the surprising flood of spending announcements that have been released before the budget – the latest being Monday’s $7 billion for infrastructure – economist Dale Orr believes stimulus spending of $19 billion in 2009-10 fiscal year and $15 next fiscal year.
The deficits will be even larger due to a sharp drop in revenue flowing into the government’s coffers because of the downturn.
Most economists view spending on job-intensive infrastructure projects as among the most effective ways to stimulate the economy short term, and praised Monday’s announcement.
In a paper released separately, Benjamin Tal of CIBC World Markets estimated that $10 billion in infrastructure spending is ready to go this year and could potentially create 110,000 jobs, while boosting the country’s gross domestic product by 1.5 per cent.
Along with the $6 billion of unspent infrastructure projects Ottawa already has in the pipeline from previous years – the added commitment, along with provincial and municipal participation – would put that figure well beyond $10 billion.
“Given the fact we are running a huge infrastructure deficit, I think it’s a huge win-win situation,” said Tal. “We have to face it, what we are doing now is buying jobs and infrastructure has a much higher multiplier in terms of creating jobs.”
But the spending commitments announced still leave Ottawa with about $10 billion to play with in the budget, some or most in the form of tax cuts.
In a brief scrum, Finance Minister Jim Flaherty said the budget will aim “to stimulate the economy, (encourage people to) buy Canadian, and take some steps to protect Canadians tomorrow.”
Earlier Monday, the Canadian Manufacturers and Exporters association called for the budget to address the issues of business credit and liquidity and to make adjustments to the tax system.
A monthly survey of manufacturers conducted for the CME indicated that there has been a deterioration in the number of new orders they’re getting in the early days of 2009.
The survey found 21 per cent of the respondents said the value of their orders in early Janaury fell by more than 30 per cent compared with October – putting one-fifth of the 379 respondents in the weakest category.
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Some key spending measures the Harper government has signalled for Tuesday’s budget:
-$4 billion over two years for ready-to-go provincial and municipal infrastructure projects, including roads, bridges and sewers.
-$2 billion for repairs, maintenance and construction at colleges and universities.
-$1 billion for “green” infrastructure.
-$2 billion for housing.
-$1.5 billion to retrain workers.
-$1 billion to help single-industry towns.
-$500 million for agriculture.
-$150 million for forestry.
-Billions of dollars in loan guarantees for the auto industry.
