July 24, 2015 / 9:42 PM / 2 years ago

PM's budget law limits options as Canada flirts with recession

3 Min Read

OTTAWA, July 24 (Reuters) - Canada's Conservative government may have tied its own hands by launching anti-deficit legislation just as the global oil price shock was pushing the country to the edge of recession.

What had seemed like a prudent measure now means Prime Minister Stephen Harper has less room to maneuver just months from an election, even if he wanted to.

Final data has not been published, but the economy likely shrank in the first two quarters of 2015, sparking calls by some for fiscal stimulus.

Mostafa Askari, assistant Parliamentary Budget Officer, said the law doesn't appear to allow for the government to respond to slow growth outside of a recession.

"In those cases, one would expect that the government should have the flexibility to respond to that and run a deficit," Askari said.

Harper, who forecast a balanced budget for 2015-16 following years of deficit, has said he will not risk that hard-won balance, betting fiscal prudence will help him win re-election in October. Harper's Conservatives are trailing in the polls to the left-leaning opposition.

Harper repeated that target on Friday, two days after a Parliamentary watchdog forecast the country would run a deficit this fiscal year.

The finance minister's spokesman said the latest budget included room to account for global weakness.

The new law lets governments run deficits during recessions or extraordinary situation, but it imposes consequences. Operating spending and salaries for ministers and some bureaucrats are frozen after the economic recovery begins.

If a deficit is run in normal times, operating budgets would be frozen immediately and ministers would see their salaries cut 5 percent.

Still, Askari said a government that projected a surplus could slip into deficit during the year and not trigger consequences, as long as the books are balanced when it releases its next budget. The recession can also have occurred, be occurring or forecast at the time the budget is tabled, according to the legislation.

The legislation can also be changed or suspended by Parliament. Many Canadian provinces were forced to suspend their balanced budget legislation following the financial crisis.

But politics may trump economics, said University of Manitoba professor Wayne Simpson, who has studied provincial balanced budget legislation.

"Bad economic policy never inhibited what people consider good politics," said Simpson. "It's a popular thing to indicate that you're serious about being financially responsible ... and balanced budget legislation seems a way of sending that (signal)." (Editing by Jeffrey Hodgson and James Dalgleish)

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