Analysis: Experts see risks from Canada's fixation on balanced budget

Tue Mar 12, 2013 4:19pm EDT
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By Louise Egan

OTTAWA (Reuters) - The government's steely determination to balance Canada's budget by 2015 could brake an economy that is already showing signs of strain, as Ottawa seeks to rebuild a reputation for prudence that made it the envy of the industrialized world.

The 2013-14 federal budget, due later this month, is set to reinforce the government's message that the deficit will be eliminated by 2015, an election year, and it will include what Finance Minister Jim Flaherty called "more sacrifices" from various ministries in the form of spending cuts.

But not everyone agrees that the tough fiscal targets make economic sense, given that Canada just recorded the weakest two quarters of economic growth since the 2008-09 recession.

"I don't think there are any economists that are particularly concerned about the deficit at this point," said David Macdonald, a senior economist at the Canadian Centre for Policy Alternatives (CCPA), an Ottawa-based think tank.

The Parliamentary budget officer, which provides independent analysis of the nation's finances, estimates spending cuts will shave about 0.6 percent from GDP this year, 0.9 percent next year and 1 percent or more in 2015 and beyond.

"This is like the minister standing up and saying: 'my plan for the economy is to cut growth by a third.' That's something no minister would ever say but that's in fact what is happening," said Macdonald.

Canada, once dismissed as a high-debt basket case, spent years between 1994 and 1997 taming its federal budget deficit, and winning a global reputation as prudent fiscal managers with a top-tier rating.

But the Conservative government allowed the surplus to turn to deficit as the recession hit, adding big spending programs to previously announced tax cuts to stimulate the economy.   Continued...

Canada's Finance Minister Jim Flaherty is framed between a cameraman and a TV camera while listening to a question after meeting with private sector economists in Ottawa March 8, 2013. REUTERS/Chris Wattie