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Economists say budget cuts risk more harm as Canadian economy shrinks by Bill Curry

Jan 31, 2012

Source: Globe and Mail

Politically, it may be the perfect time for an austerity budget. But news of a sudden contraction in the Canadian economy has economists suggesting that deep cuts now risk doing more harm than good.

Statistics Canada reported Tuesday that the economy contracted 0.1 per cent in November, following zero growth in October. The news came as Ottawa works behind the scenes on what is shaping up as a landmark budget for its cuts.

Prime Minister Stephen Harper won’t have to face voters again until the fall of 2015, giving him plenty of time for controversial cuts to fade in the public’s consciousness. His competition – the NDP and the Liberals – are both without permanent leaders. And internally, Conservative MPs who were never happy with stimulus spending in the first place are pushing hard for deep spending cuts in areas like the CBC.

On Bay Street, BMO Nesbitt Burns deputy chief economist Doug Porter raised concerns that while Ottawa is ahead of schedule this year on its deficit target, talk has ramped up of late that the upcoming budget will unveil cuts that will be deeper and come sooner than what the Conservatives signalled last year.

“The headlines are full of how the federal government is preparing for deeper cuts and a more rapid attack on the deficit. We would simply ask …to what end?” he wrote in a research note. He added that “growth has slowed – our call of a 2-per-cent GDP rise this year is on the optimistic side of consensus – and hardly needs another downward shove from even deeper restraint than the already formidable tightening expected from the provinces this year.”

Mr. Porter is right that Ottawa has been signalling deeper cuts of late. Treasury Board President Tony Clement, who led a cabinet committee that recommended spending cuts for the upcoming budget, noted this month that permanent spending cuts could be as high as $8-billion a year, which is twice the $4-billion target announced in the 2011 budget.

While all federal departments were asked to submit plans for 5- and 10-per-cent cuts, Finance Minister Jim Flaherty has said some departments may face cuts that are deeper than 5 per cent.

The details won’t be known until the budget is unveiled – which is likely to come next month. But as recently as last week, Prime Minister Stephen Harper delivered a major speech in Davos that restated his commitment to balanced books in the medium term.

The slower economic growth has not yet hurt federal revenues. As of November, Ottawa is on track to produce a much smaller deficit for the current fiscal year than the $31-billion forecast in Mr. Flaherty’s November fiscal update.

When asked about the GDP numbers, Mr. Flaherty’s spokesperson, Mary Ann Dewey-Plante, did not address them directly, but noted the IMF forecasts Canada will have the strongest economic growth in the G7.

But as budget season enters the final stretch, the opposition is hoping the latest GDP numbers will boost their call that now is not the time for deep cuts.

“Cuts of $8-billion would have a profound negative impact on the economy,” NDP finance critic Peter Julian said. “This is not the time for an austerity budget.”

© Globe and Mail