Federal budget to detail big stimulus plan

Fri Jan 23, 2009 2:52pm EST
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By Louise Egan

OTTAWA (Reuters) - Canada's fiscally conservative government is poised to set aside its ideals by introducing a massive stimulus package in its budget next week, ending more than a decade of budget surpluses.

Bowing to the ill economic winds that have forced other advanced economies into concerted action to stave off economic and financial calamity, Conservative Prime Minister Stephen Harper is under intense and conflicting pressures to produce a spending plan that lifts the economy out of recession and upholds Canada's track record as a relatively debt-free nation.

With its political survival also at stake, the government took the controversial step on Thursday of saying the government would run a C$60 billion ($48 billion) deficit over the next two years, even as the nation's central bank forecast this recession would be extraordinarily deep, but that the economy would rebound swiftly.

"Canadians no longer see the government as a passive player but are calling on the government to actively intervene in the economy and not just sit on the sidelines," said David MacDonald, analyst at the Canadian Centrefor Policy Alternatives, a think tank.

Harper, who as recently as October scoffed at the idea of deficit spending, is now prepared to commit up to C$30 billion on emergency actions next year to bolster the economy against the worst global financial crisis in 80 years. The plan will focus on fast-tracking infrastructure projects but will also include tax cuts, help for the unemployed and loan guarantees for banks, officials and sources have said.

Even without those measures, economists think the government could run a deficit of at least C$10 billion in 2009-10, compared with the surplus of C$13 billion Harper's Conservatives inherited when they took office in 2006.

An aide to Harper said on Thursday the deficit would be C$34 billion next fiscal year and C$30 billion the following year, the bulk of which would be comprised by the stimulus package. In the current fiscal year ending in March, Ottawa may post a small surplus although that is no longer a certainty. Canada last posted a deficit in 1996-97.

If the winds are in its favor, Ottawa may be able to balance its books again in five years, analysts said. But the easy surpluses of the past are over, they said.   Continued...