Alternative Economic and Fiscal Update

The CCPA released an Alternative EFU today by yours truly (with lots of helpful comments from other PEF bloggers!). It is available here.

The EFU is a prelude to the feds’ own EFU to be released Thursday. I modeled four scenarios of economic downturn to see what the status quo deficits look like, as other analyses to date have not been pessimistic enough, in my opinion, given the macro forces at play. The bottom line is that deficits could get fairly large, particularly in my most pessimistic scenario they could hit $47 billion in 2010/11, although relative to GDP that would still be much smaller than in the early 1990s (3% of GDP compared to 5.6%) and based on a recession (real GDP fall of 1.5% in 2009) less severe than 1991 (real GDP drop of 2.1%). In other words, depending on how things go, my most pessimistic scenario may not in fact be pessimistic enough.

I argue that the feds should accommodate and such deficits that emerge from the downturn, but that an additional stimulus package is warranted. The final section outlines a six-point plan for a stimulus including maintaining support for the current fiscal plan; reinforcing EI as an automatic stabilizer; strengthening other income support measures; a green infrastructure plan; manufacturing supports contingent on green technology development; and preventing foreclosures.

The media coverage has been good (CP story, CanWest story, CBC story), and the response much more positive than it would had we released it two months ago. The mainstream view is no longer that deficits cause cancer.


  • This is a great update, a fine example of the highly professional work being done by the CCPA.
    When I left this subject, back in the 90s, the question of which surplus (deficit) was paramount. The operating surplus of the government was in the $50 billion range, interest payments on the debt were $30 billion plus, so what was the surplus? The mainstream went with the difference between the two. I always thought that made little sense. For a deficit the real number is what has to be financed or what the Brits used to cal PSBR (public sector borrowing requirement). For a surplus the deflationary impact is best captured by excluding interest payments, is it not?
    In other words the amount of stimulus/restraint should be measured by changes in the operating deficit/surplus, not by changes to the budgetary balance. I don’t know what the econometricians have to say on this, but would be interested to hear more.
    Finally Marcs paper uses per cent of GDP effectively to measure the room for the deficit to grow. In the report on the National featuring Marc, the shirt and tie from the TD bank (architect of the Martin 1995 budget) used absolute numbers, the old deficit terrorism tactic (which spooked the Rae government away back when). Comparisons with Europe help. They have the 3 percent rule for deficit/GDP (and have exceeded it as a group) and the debt/GDP rule of 60 percent (Canada is one-half of that).

  • this might be a ‘deal breaker’, one we wouldn’t want to give up, finance being the king pin of the problem:

    “more capacity is required to ensure adequate regulatory oversight and enforcement in key areas like finance, environment and health and safety.”
    -from Marc’s paper at CCPA

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