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Budget ’09: The Overview

Government spends big in its recession rescue plan


 

Budget '09 Highlights

In today’s federal budget the Conservative government outlined an unprecedented, two-year $40-billion stimulus plan aimed at trying to rescue an economy in recession during “extraordinary times.” It includes massive spending on infrastructure and home construction, aid to struggling industries, communities and workers, and renewed efforts to ease access to credit to get consumers spending again.

After days of orchestrated leaks and announcements, the budget gave Canadians the first full picture of an “economic action plan” that the government says could add 190,000 jobs and perhaps have the economy on an upswing again within two years. “We must do what it takes to keep our economy moving, and to protect Canadians in this extraordinary time,” said Finance Minister Jim Flaherty in his budget address.

Also at Macleans.ca
Budget ‘09: Tories take a final leap into the void
Budget ‘09: Bailout
Budget ‘09: Stimulus
Budget ‘09: Economic Outlook
Budget ‘09: Personal Finance

The stimulus plan, which will bring a return to the kind of deficit spending not since the early 90s, leaves few stones unturned—there are promises of financial relief for all (from river-boat tourism on the Saguenay to slaughterhouses on the prairies). Stimulus and aid money will be spread far and wide to all of Canada’s hardest hit industries, including $7.5 billion focused on the forestry, auto and manufacturing sectors as well as to fund clean energy.

Much of the efforts are aimed squarely at returning consumer spending habits to those more in line with the boom times. The government will put a total of $200 billion towards easing the so-called credit crunch, making it easier for businesses to get loans and for consumers to borrow to buy homes and cars. That includes an additional $50 billion (on top of $75 billion already announced last year) to buy up insured mortgages to reassure lenders. As much as $12 billion will be put into a fund to support financing of cars and equipment for consumers and businesses—welcome news for the ailing auto industry.

Almost $8 billion over two years will be spent to kick start the housing and construction industries. The provinces are expected to add an extra $1.5 billion to that figure. “A lot of this is about confidence,” says Glen Hodgson, chief economist with the Conference Board of Canada. Ultimately, people and businesses need to feel comfortable spending again.

Middle class families also stand to gain, though only modestly, through tax cuts and reforms. The cut-off level for the lowest income tax brackets will be raised 7.5 percent. Those who have already lost their jobs in the economic storm will be offered more funding and access to job training (the government will spend $1 billion over two years on training) .

All this comes on top of previously leaked plans to spend $12 billion on infrastructure projects across Canada over the next two years—”the largest building projects in Canada’s history,” notes the budget. While critics have questioned the government’s ability to spend that much money quickly enough to act as a useful stimulus, the budget promises that ‘shovel-ready’ projects will begin in the coming months. That won the plan a ringing endorsement from the Federation of Canadian Municipalities.

This strictly-business budget—complete with the much discussed $30-billion deficit—was a radical departure from the relatively rosy outlook of last fall’s economic statement. And there was no hint of the political gamesmanship that very nearly brought down the government. This time around, just an acknowledgment that times have changed as the reality of the recession has set in.

The sheer size of the spending plan leaves little ground for the opposition parties, which for months have been demanding more serious fiscal stimulus plans, to find fault with the budget. As a share of GDP, Canada’s stimulus package is larger than those in Britain, France, Japan and Germany, according to budget documents.

But some questioned the sincerity of the budget, speculating it’s a thinly disguised effort to appease the opposition. “This is a Conservative budget,” Flaherty told reporters. “Conservatives understand that the government must respond.” Liberal finance critic John McCallum said he wasn’t concerned with the size of the plan, but whether the money is well spent. “The economy needs stimulus. We’re in desperate circumstances,” he said in a television interview after the budget announcement. “We want to make sure the money gets out the door and where it’s needed.”


 

Budget ’09: The Overview

  1. Well I won’t be voting Conservative ever again.

    • Yup. I’m out too.

      Unfortunately we don’t get too many chances here in Canada to have a government that is supposedly interested in reducing both spending and taxes. We finally get someone elected on just that type of platform and within three months they’re tabling a budget that the NDP wouldn’t have the guts to submit!

      The only problem is… who to vote for next time?

    • The conservatives have gone against what they said but it is better than having the socialist liberals, the communist NDP and the separatist in power

  2. What a joke. Why would Canadians ever cast a vote for these guys? This is the EXACT OPPOSITE of what they campaigned on.

  3. who would have thought that I would be begging for Paul Martins return three years later?

  4. I don’t know what’s more depressing. This budget or the fact that it will be defeated by an opposition that wants even more.

  5. 1. Canada’s stimulus, both in dollar amounts, and as a % of GDP is smaller than almost any other advanced industrial democracy.

    Obama’s stimulus is supposedly about 800 billion in ONE year (and that’s before congress adds riders for the Las Vegas harbour front, etc.), after a 700 billion dollar bailout of the banking sector (which was extremely poorly spent). That is in addition to America’s existing and already large deficit.

    Britain’s right wing “New Labour” government nationalized the banks.

    EU leaders – including a conservative Sarkozy and Merkel – have agreed to a 267 billion dollar stimulus – in addition to their existing deficits.

    And what is Andrew Coyne quaking in fear over? A stimulus of 1.5% of GDP (18 billion versus a 1.2 trillion dollar economy) – of which the biggest item is infrastructure (and therefore not permanent spending). Corporate tax cuts and income taxes were both included as well. Will people assume that their taxes will just be increased later? Not likely.

    The government currently takes in roughly 400 billion in taxes, and will spend a bit more than that 434 billion, post stimulus. The amount of stimulus spending is 3 billion lower in 2010, and another 10 billion lower in 2011-2 (presumably just the tax cuts would remain). So how much room does the government have to get to a surplus in 5 years?

    Well, there will be additional interest costs from 84 billion more in debt. Lets say it is 5%, which is 4 billion, plus the 5 billion cost of remaining tax cuts. So 5 years from now, our expenses have only increased by 9 billion permanently. Obviously the government will spend more, but what kind of room will they have?

    The tax base is unlikely to grow in 2009 (lets assume it shrinks by 1%), and grows slowly (2%/year) for the 4 years after. With those modest assumptions, the tax base 5 years from now is 429 billion. In other words, the government could increase spending by 20 billion, would pay 4 billion in interest, and 5 billion in long-term stimulus costs, plus the 400 billion for existing programs (in real terms) and still have a balanced budget.

    Deficits are kind of like smoking. They are bad for you, but the effects of having only one or two are minimal. The real problem is when one gets addicted to them and can’t live without them. Conservatives should be vigilant that their government avoid that problem over the next 5 years. At the same time, we surely want to hang out with the cool kids at the next G8 meeting.

    • Comparisons to the US situation don’t cheer me much. The US has become a fiscal basket case, as has the UK and much of Europe. We seem intent on joining them, though our plunge into the abyss seems much more tepid than most other developed countries.

    • Guess your motto is: “US has its own idiots, Europe has lots of idiots, we Canadians are behind, we demand to have our own idiots”.

  6. What do you mean, “to save himself…?” Thank goodness he saved all of us from the other parties, and most of all the coalition! Their formula could only have been worse…for for too long!

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