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Deficit will linger half decade, watchdog warns

From Wednesday's Globe and Mail

OTTAWA — Canadians should expect at least half a decade of federal government deficits, the country's parliamentary budget watchdog says, as Ottawa readies a massive stimulus package to tackle the economic downturn.

The Harper Conservatives, who promised during the 2008 election campaign never to run a deficit, are now saying they will run temporary deficits to bail out the economy. They pledge to plot a course for returning to balanced budgets.

Parliamentary budget officer Kevin Page says that an early return to black ink appears difficult.

"It's unfortunate, but we're not going to be like we have been in the past 11 years," Mr. Page said, referring to the string of balanced budgets and surpluses Canadians have grown accustomed to since Ottawa climbed out of deficit in 1997-1998.

He is paying close attention to forecasts of what economists call the output gap: the shortfall between what Canada could produce using all resources and what it's actually producing. This gap, measured as a percentage of economic output, emerged in 2008.

The sharp downturn - and the likelihood the economy won't rebound quickly - means this gap is expected to be sizable over the next few years, perhaps 4 per cent or higher at times.

The problem for Ottawa is this idled production puts downward pressure on the amount of tax revenue the federal government collects.

Mr. Page says projections still show a "pretty sizable output gap even five years out."

It will be difficult for Ottawa to easily cut spending to balance the books - effectively withdrawing stimulus from the economy - while the gap is still significant.

"It would be very hard to bring it back to balance in five years," Mr. Page said.

One of his staff suggested it might even take Ottawa seven to 10 years to return to balanced budgets under some scenarios, but cautioned there are too many factors at play to forecast with precision.

Mr. Page said, however, that in excess of half a decade is probable. "It's going to take more than five years," he said.

Parliamentary Budget Office staff say Canada's comeback will depend greatly on how quickly the U.S. economy recovers, given Americans buy 80 per of this country's exports.

Still, Mr. Page counsels Canadians to remember that the deficits Ottawa will likely run are far smaller as a percentage of economic output than those of other countries. Even if the Harper government spends $30-billion in 2009-2010 - the upper limit of planned stimulus - this amounts to only 2 per cent of Canada's annual economic output.

The U.S. government is forecast to run a $1.2-trillion deficit in the 2009 fiscal year, he notes, which would exceed 8 per cent of that country's annual economic output.

The Harper government has stressed it prefers to make its stimulus temporary, although a public debate has ensued over whether Ottawa should make some of the programs permanent.

Mr. Page's office warns, however, that Ottawa must be careful not to add more than $6-billion of permanent new annual spending, saying amounts beyond that would be enough to create a "structural deficit" - one that persists even when the economy is back running at full steam.

The parliamentary budget officer, appointed by the Harper government to offer independent scrutiny of fiscal forecasting and budget measures, was reluctant to offer advice on how Ottawa should allocate stimulus spending.

However, Mr. Page spoke in favour of some measures, saying that infrastructure spending would do more for Canada's long-term needs than temporary tax cuts.

"If you just unload of lot of this in temporary tax cuts ... you're not really going to solve any of those longer-term issues. Infrastructure spending will give you a way bigger pop."

When it comes to temporary tax cuts, however, Mr. Page said short-term reductions in employment insurance premiums - paid by workers and companies - would be especially good for stimulus.

"In terms of the three Ts, it would fit and you'd get a good pop," he said, referring to the theory that stimulus spending should be "timely, targeted and temporary."

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