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Earlier discussion

The budget and the economy

Globe and Mail Update

So much has happened since the November economic statement, and so much has changed.

Parliament resumes Monday with the Speech from the Throne, and then on Tuesday all eyes are on the budget.

While other nations have pursued a policy of "bailout plan first," Canada is taking a legislative approach to economic stimulus.

Analysts are watching for big spending plans, big deficits and anticipate a relatively gloomy outlook.

Ottawa is looking for big impact, turning its eye to pulling through the economic slowdown this year and seeing some recovery in 2010.

Heather Scoffield has been The Globe and Mail's economics reporter for the past 3½ years, first in Toronto and now based in Ottawa.

She has covered monetary policy for The Globe for the past eight years. She has also covered fiscal policy, industrial policy and trade policy for The Globe, and has written about every federal budget since 1997.

She took questions Monday to talk about the country, the economy and the budget.

Editor's Note: globeandmail.com editors will read and allow or reject each question/comment. Comments/questions may be edited for length or clarity. HTML is not allowed. We will not publish questions/comments that include personal attacks on participants in these discussions, that make false or unsubstantiated allegations, that purport to quote people or reports where the purported quote or fact cannot be easily verified, or questions/comments that include vulgar language or libellous statements. Preference will be given to readers who submit questions/comments using their full name and home town, rather than a pseudonym.

Cathryn Motherwell, deputy editor, Report on Business: Welcome to this pre-budget Monday. As part of our continuing offering of discussions on key issues, we introduce Heather Scoffield, the Globe's economics reporter. Based in Ottawa, she brings a unique perspective to the coverage of what will be a most interesting and all-encompassing document on Tuesday. We have many reader questions, so we'll dive right in.

News from Ottawa writes:

In every jurisdiction where it has been tried, most recently in Japan, massive government spending to blast the economy out of an economic sinkhole has not worked according to plan. Rather, it has impoverished future generations left to deal with the debt. Our economic problems are due to US greed and US malaise. Rather than ballooning our national debt unnecessarily, why not let the US solve their issues, one way or another, which will automatically lift us out of the mess that has spilled over the border from them?

Heather Scoffield:

The free-rider approach to economic recovery probably isn't the best way to maintain good relations with the rest of the world. Besides, I'm not sure the Canadian public would be willing to wait that long for recovery. The massive stimulus packages being offered elsewhere in the world will no doubt benefit Canada eventually. But Canada has also agreed, through its participation in the G8, the G20 and the IMF, to pull some of its own weight too. Even so, a full recovery in the United States is years away, and would only trickle through to Canada through exports and stability in financial markets. We need that, but we also need some help with domestic demand, which is contracting. That's what Canada's own stimulus is for.

Bob Robert from Canada asks:

The government should offer an early retirement incentive. With all the boomers nearing retirement this would help youth and allow companies to reduce their payrolls.

Heather Scoffield:

You touch on some good points: youth are likely to feel the brunt of the effect of the recession. And surveys suggest many older workers are cancelling their early retirement plans because their savings have been hammered in the market, and because their plans for post-retirement work look shaky. Plus, economists have recommended for years that Ottawa reform the Canada Pension Plan to give older workers more flexibility to collect benefits and ease their way out of the workforce. But I think there's also incentive for individual companies to design their layoff packages to keep their younger employees and encourage the older ones to leave. Often, older workers can use severance packages to bridge to retirement.

Alan Pater from Vancouver asks:

Canadian households have taken on record levels of debt during the last decades. What could be included in the budget to ensure that household debt is reduced to more reasonable levels while increasing employment?

Heather Scoffield:

I doubt the government will have anything to specifically lower household debt, beyond using fiscal stimulus to boost the economy, create jobs, and generally trying to prevent conditions from deteriorating so badly that household debt would become unmanageable for many families. The Bank of Canada flagged household debt as being in a risky position if the recession takes a major turn for the worse. Household debt burdens are widely considered manageable for now, however, since some interest rates are quite low and credit is still widely available. That could change if unemployment increases rapidly. So Ottawa would be best targeting unemployment rather than specifically looking at household debt.

Patricia Seeley from Toronto asks:

The Conservatives are on record as opposing big government spending and deficits, but are proposing just that in the upcoming budget -- in fact, they've already 'bought' support in a lot of sectors by divulging many of their budget 'secrets' ahead of schedule. I suspect that this radical turn-around is a cynical and desperate move to hold on to power. Do Canadians really expect them to administer this stimulus program in an intelligent and helpful way, when it goes so thoroughly against their political grain?

Heather Scoffield:

The argument you present is a good summary of the NDP position. Leader Jack Layton argues that regardless of what ideas the budget presents, he does not trust Prime Minister Stephen Harper to actually implement the ideas. But the Conservative government will live or die depending on how they manage the economy in the coming year. There's no doubt that running a deficit and purposely enlarging it with a stimulus package goes against their political grain, as you say. But I think they learned a thing or two in November, when they let their political grain run amok and almost lost their hold on power.

Alan Stewart from St. Catharines Ont. writes:

Heather, would it be wise for the government to start with Obama's stimulus bill shrunk to Canadian size, or at least include a specific idea or to and acknowledge it as taken from Obama, or would that be too transparent an attempt to fend off negative comparisons between Harper and Obama?

Heather Scoffield:

Canada should definitely be watching the U.S. stimulus packages closely. They have been experimenting with stimulus for over a year now, have mounds of research on what works, what doesn't, and what type of government package can best target certain problems. But I don't think Ottawa should be striving to copy the structure of Obama's package. Canada has its own unique economy which requires its own unique stimulus. Plus, the size of the package in the United States will be, and needs to be, much bigger than here (measured, of course, in proportion to the size of each country's economy). It looks like Ottawa's package will amount to 1.5 per cent of gross domestic product, while the U.S. package will be much bigger. But their problems are also much bigger.

Auroran Bear from Montreal asks:

Why isn't Canada taking advantage of the economic downturn to diversify out of the auto industry? The U.S. has the critical mass advantage here so why aren't we looking at moving into other industries where we have a comparative advantage?

Why not sponsor a home grown auto industry based on alternative energies that would produce cars that are actually in demand globally?

Heather Scoffield:

Ontario's economy has prospered most years partly because of its auto production, and it has actually taken me by surprise that the Ontario economy didn't stumble earlier, as the U.S. economy sank and cut back its demand for cars. So that speaks to the already-diversified base of the province's industries. But of course, governments should be thinking ahead, and design their stimulus in a way that will take into account the pressing need for alternative energy. Governments in Canada and the United States have made their emergency lending programs for the auto companies contingent on them having a reasonable business plan for the future, so there are signs they want to see evidence that the Detroit Three will produce cars that will be in demand for some time.

Ryan Dykstra asks:

I understand that a paper is to report what others say. Why not question that what is being said at times? This question stems from the comments that the various economist shave spouted off the last number of weeks, from there is no recession, Canada is in good shape to Canada is in recession. Inflation is bad to inflation is needed to get us out of debt.

The public is getting confused with all the retoric and would refreshing to see an article that spells out what the ramification are ifyou do this and when you do that.

I understand full well most of it will be based on assumptions but at least you are introduced to the issue from both sides.

Thank you, Ryan

Heather Scoffield:

Economists love to joke about how they never agree, but the Globe does try to present a coherent story about the economy that allows readers to understand what is happening, in addition to exposing various interpretations of developments. It seems to me that Canada is in a recession, but compared to other countries, we have some underlying strengths that will help us face the bad times with less pain than elsewhere. As for inflation, it was a huge problem in the summer, as food and fuel prices rose, so many policy makers believed it was, as you say, "bad." Now, deflation is a risk, so that's also not good news. And in the United States, where the Federal Reserve's key rate is basically zero, many experts believe that the best way for policy makers to get people and businesses back buying, lending and borrowing again is to print money. That will pose an inflation problem later, but it's thought easier to solve an inflation problem than a deflation problem.

So, yes, it's all changing so quickly that it can be bewildering. But presenting many different points of view is a sign of a healthy debate at a crucial time.

Peter H from Ottawa asks:

With the NDP and Bloc saying they will almost certainly vote against the budget, the pressure is going to be on the Liberals. At this point, they have no money to go to an election and the coalition is not very popular. Do you think the Liberals are going to be looking for a way to vote for the budget even if it includes/excludes some stimulus measures Ignatieff has opposed such as tax cuts?

Heather Scoffield:

The benefit of introducing a huge stimulus package is that the Conservatives can put something for everyone in there, and make it very difficult for the Liberals to say No. Plus, I don't think the electorate will have much patience with political brinksmanship, now that the economy is in a recession and meaningful policy action in Ottawa has been delayed for months, first by political posturing, then by an election campaign, then by a poorly designed and spiteful economic update, and finally by prorogation. So I can see the Liberals supporting the budget, warts and all, but keeping the Conservatives on a short leash as they move to implement the measures.

DJ from Canada asks:

What do you think of Peter Schiff's contention that the U.S. economy is a house of cards that has already started to collapse ? He was the contrarian when everyone else was cheerleading for Wall Street.

Heather Scoffield answers:

Peter Schiff's latest concern is that the U.S. government is issuing too many Treasuries, creating a bubble. I believe he argues that the bubble could burst because the rest of the world can only carry so much U.S. debt without wanting more of a return.

Indeed, the question of whether Treasuries are in a bubble is hotly debated far and wide these days. And given the amount of bubble-bursting these days (housing, commodities), it's not wise to ignore these questions. Still, U.S. consumption is hugely important to the entire world economy. It makes up about 15 per cent of global demand. Plus, U.S. Treasuries are widely considered as safe as safe can be. So there are good arguments on both sides of this bubble debate. I do wonder, however, how wise it was of the new U.S. administration to deliberately poke China in the eye and consider labeling China a currency manipulator, when China's holdings of Treasuries are so important right now.

Cathryn Motherwell:

Heather, thanks for taking the time today to answer reader questions. Do you have any last observations as we head into budget day on Tuesday?

Heather Scoffield answers:

Thanks for your thoughtful questions. Tuesday's budget will likely prove to be a seminal one. More important will be the government's implementation of its measures. Will it be able to push its money out into the economy quickly enough and in a way that is targeted at the recovery, or will it drag its feet, or succumb to the various policy agendas fighting for supremacy these days. Judging from the questions here today, well informed Canadians are watching closely!

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