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    Canadian Centre for Policy Alternatives
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Flaherty responds to Marc’s report

The Finance Minister denies my charges that a slowdown could lead to a deficit, as reported on CBC:

Flaherty rejects think-tank’s deficit warning

Last Updated: Monday, January 14, 2008 | 2:50 PM ET

Finance Minister Jim Flaherty said Monday that there’s no substance to worries that the country will head back into a deficit situation if the economy slows. Flaherty was responding to a new report by the left-leaning Canadian Centre for Policy Alternatives (CCPA), which warned that the federal treasury could easily record a deficit if economic growth slows more than the government expects.

“If [the CCPA] had been paying attention they would have noticed that in the autumn we were anticipating some slowing in the Canadian economy, as a result of the quite significant slowing in the U.S. economy,” Flaherty told reporters at a Vancouver news conference. “For that reason, in the fall economic statement on Oct. 30, we made dramatic historic tax reductions — business tax reductions — in Canada,” he said.

“We will keep spending within the rate of growth of the economy, and quite frankly, I hope to do more than that,” he said. “I want to make sure we keep the budget in surplus.”

It is worth pointing out that I simply used Flaherty’s own numbers and modeled changes in rate of economic growth, from a mild downturn to a full-blown recession. The may have knocked down their growth estimates a bit in the EFU, but their estimate of 4.8% nominal growth is arguably now on the high end. But I’m not a forecaster; my point was merely to see what happened if the economy goes south. And also to ask what federal parties would do in such circumstances.

It is also interesting that Flaherty, as I suspected, has changed his tune from tax cuts resulting from good economic times to tax cuts as the answer to a downturn. Pose the question any way you like and the answer always comes up tax cuts!

The CCPA says the tax cuts announced last October give Ottawa little wiggle room to stay in surplus should be economy turn sour.

The centre’s report outlines four possible scenarios for the economy and even under its least pessimistic version — inflation-adjusted growth of one per cent this year and 1.5 per cent next year — the budget surplus would vanish in 2008-09 and become a $2.4 billion deficit by 2009-10.

The CCPA said the federal government “can and should” run a deficit if the economy turns down. “The biggest danger is that the feds will respond by cutting spending in order to maintain the budget balance, a move that would only worsen the downturn,” said the CCPA’s chief economist Marc Lee, the report’s author.

Flaherty was in Vancouver to launch the Finance Department’s pre-budget consultations. Flaherty will tour the country, hearing ideas from business leaders about what they’d like to see in the budget. The department’s online pre-budget consultation initiative last year attracted almost 8,000 submissions from the public.

“Although our economic fundamentals are solid, we need to focus on the various risks and challenges that confront us,” Flaherty said in remarks posted on the Finance Department website. “These include the impact of an economic slowdown in the U.S. and ongoing turmoil in financial markets, the continuing need to adjust to a higher Canadian dollar and increasing global competition, as well as the aging of the Canadian population.”

Flaherty and Prime Minister Stephen Harper have already cautioned that there may not be much additional tax relief or new spending in the budget.

“We will be extremely cautious in the year to come,” Harper said on New Year’s Eve as his government’s latest GST cut was about to go into effect. “We’re not going to undertake any long-run spending or tax reduction initiatives unless we believe they are affordable on a long-term basis.”

Unfortunately, Flaherty did not answer the question: what would the Tories do if faced with a deficit. I suggest that they would be more likely to keep their tax cuts and cut spending instead, precisely the wrong move in fiscal policy terms.

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