Harper says deficits will combat climate of fear

Thu Jan 15, 2009 7:32pm EST
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OTTAWA (Reuters) - Prime Minister Stephen Harper said on Thursday it was worth running substantial budget deficits to sustain the economy at a time when people and businesses are afraid to spend and invest.

"Because of the unprecedented nature of the turmoil in global markets, we're seeing a lot of money sitting on the sidelines. We know many people are afraid to spend. We know that businesses are afraid to invest. We know that even in bond markets, people are worried about capital losses," Harper said in an interview with the National Post newspaper.

"In that downward spiral of economic activity, with money sitting on the sidelines, this is the time for government to come in, to borrow money at low rates and make sure that money goes to productive usage in the economy immediately -- to sustain confidence and in some cases to make some good investments that will strengthen the economy down the road."

He said that would very marginally boost Canada's debt-to-GDP ratio -- the size of the debt relative to the size of the economy -- which has been decreasing over the past decade as Canada ran surpluses.

The Conservative prime minister, re-elected in October with a strengthened minority government, had campaigned on keeping a steady hand on the economy and keeping the budget in the black but now says it is necessary to run large short-term deficits.

"First of all, let's be clear, everyone around the world is going to be running deficits. Those deficits everywhere are going to be large and in most countries will be much larger than Canada's because they started in a far worse financial situation than Canada," he said.

The Canadian government will end in a relatively stronger financial position than governments of other countries "because their positions are going to deteriorate markedly and ours are not."

"We have the financial situation that allows us to borrow money in the short term and spend that money, as long as most of that is time-limited spending," he said.

He added that most initiatives in Canada's January 27 budget would be for only one to two years, to avoid running long-term deficits.

(Reporting by Randall Palmer; Editing by Peter Cooney)

<p>Prime Minister Stephen Harper (L) and Quebec Premier Jean Charest wait for the start of the First Ministers' meeting in Ottawa January 15, 2009. REUTERS/Chris Wattie</p>