Mounting deficits raise urgency for governments to switch from spenders to savers

In the last two days, Ontario reported it will suffer a $24.7-billiondeficit in the current fiscal year, almost double its March projection,and the federal government said it is already $23.7 billion in the red,only five months into its year.

OTTAWA - The bills are coming in across the country, and they are hefty.

In the last two days, Ontario reported it will suffer a $24.7-billion deficit in the current fiscal year, almost double its March projection, and the federal government said it is already $23.7 billion in the red, only five months into its year.

With Quebec issuing an update next week - expected to be worse than previously thought - the TD Bank is also revisiting a report it issued earlier this week that the total public sector shortfall will be at least $90 billion this year.

It more than likely will be in the $100-$110 billion range.

TD Bank economist Derek Burleton says governments are creating such a debt elephant that they will need to cut spending drastically or even raise taxes to prevent Canada from falling into the deficit nightmare of the 1970s, '80s and '90s.

"There's a case to be made that the era of restraint Canadians are looking at over the next three to five years is going to keep our growth lower than otherwise would be the case," Burleton said.

Bank of Montreal economist Douglas Porter agrees that governments will soon have to shift their attention from how to spend to stimulate the economy to how to kill the monster they created.

On Friday, Finance Minister Jim Flaherty told a business audience near Toronto that the government needed to pump spending in the face of a deep recession.

And he repeated the familiar mantra that Canada is "by far" in the best fiscal position among Group of Seven countries to pay off its mounting debts.

But economists say that distinction is carrying less weight with each new government recalculation of upcoming shortfalls.

"I think we are going to reach an uncomfortable juncture, perhaps as early as next year, when the recovery is still relatively young, and yet deficits will be so large they will cry out for the need for some restraint," Porter said.

The majority of Ottawa's shortfall so far this year is not from ramped up stimulus spending, but the result of the recession's wreckage. Ottawa is paying out much more for such things as benefits to the unemployed and taking in far less in taxes.

That suggests that even when stimulus spending runs its course at the end of next year's fiscal period, the gap between revenues and expenses will be so wide it will take many, many years to close.

Another problem is that governments will be trying to rake in more revenue at a time when more and more of Canada's baby boom population crosses the line from tax-paying producers, to recipients of expensive health-care and pension programs.

CIBC's Avery Shenfeld says Canada is starting to lose the fiscal edge it had gained on the United States during 12 years of surplus budgets ushered in by former Liberal finance minister Paul Martin, starting in the mid-1990s.

Canada still leads, but the gap is closing, he said in a note to clients.

"The aggregate federal and provincial budget deficit burden for residents of some provinces is not that far out of line with what the Americans face," Shenfeld wrote.

"Both countries will see the economic squeeze of fiscal tightening in the next few years, even if Canada can afford to take a bit longer in getting our house in order."

Ottawa and Ontario have set a timeline of about 2015 to return to fiscal order, but many economists see that target as too ambitious by several years.

Bank of Canada's governor Mark Carney's newest forecast on Thursday predicting the economy will expand by a modest three per cent next year and only 3.3 per cent in 2011 - two years after the end of the recession - doesn't help.

Carney also warned that prospective homebuyers should be careful about how much debt they are piling on, given that the housing market is much hotter than the overall economy.

Few economists believe growth will be to total answer to deficits. Some, such as Toronto-based consultant Dale Orr, have called on Ottawa to raise taxes. Orr says a one-point hike in the GST can raise about $13 billion in two years, which would make the government's balanced budget date of 2015-16 more tenable.

TD's Burleton doesn't make any recommendations, but agrees tax hikes may be necessary and that consumer levies and user fees would be preferable to personal or corporate tax increases.

However governments choose to tackle their deficits, he said, it is becoming urgent that they lay out plans.

"The experience in Canada has shown that manageable deficits very easily have turned into very worrisome deficits," he said.

"And the longer you stretch out a deficit-elimination horizon, the bigger the chance surprises are going to come up that throw a government off track."

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