Today brings a belated new tone of realism in high places about the state of the economy. Finance Minister Jim Flaherty—who predicted, in his absurdly upbeat Nov. 27 economic update, no recession and no federal deficits—now allows that the GDP will shrink by 0.4 per cent next year and the federal government will post a deficit of at least $5 billion.
Today brings a belated new tone of realism in high places about the state of the economy. Finance Minister Jim Flaherty—who predicted, in his absurdly upbeat Nov. 27 economic update, no recession and no federal deficits—now allows that the GDP will shrink by 0.4 per cent next year and the federal government will post a deficit of at least $5 billion.
Flaherty’s overdue frankness injects greater urgency into deliberations about how he might try to pump some stimulus into the Canadian economy in his Jan. 27 budget. In Washington, detailed discussion about spending $600 billion on economic recovery measures over two years, maybe $1 trillion, is well advanced. In Canada, one of the few detailed reviews of the options came earlier this week from Dale Orr, managing director of Canadian macroeconomic services at the economics forecasting firm Global Insight.
Orr spoke with Maclean’s about what might work. An edited version of the conversation:
Q. How much would the Canadian government have to spend to make a difference in 2009?
A. The rule of thumb is one per cent of GDP.
Q. Around $16 billion then. Are you saying at least that much?
A. No, not ‘at least’—I would say that’s a reasonable number. For the January federal budget, that’s a very high number.
Q. How should they spend it?
A. It has to be timely, in other words, get in there and get going quickly. It has to be temporary, in other words, get it out when we don’t need it anymore, so we don’t run up the deficit and cause inflation. It has to be targeted pretty much on consumption and investment. You can’t just give people money so they can pay down their debts. And it has to be targeted on things that will increase productivity. We’re going to be passing on debt burden to future generations, so they should get some of the benefits because they are going to pay for it.
Q. So based on those guidelines, what did you conclude would work best?
A. Small infrastructure projects rated the highest, and a temporary reduction in the GST targeted to consumer durables, especially autos.
Q. Why only small infrastructure?
A. New infrastructure projects are hard to get going quickly. Large infrastructure projects—watch out if you’re accelerating those. Even if you overrun costs by five per cent, that’s a lot of money. Very risky.
Q. Why not income tax cuts?
A. With income tax cuts, a lot of that money people just use to reduce debt. Some of it goes into savings.
Q. Doesn’t an auto industry bailout, or special support for other hard-hit industries like forestry, count as stimulus?
A. It’s really on a different track. We wouldn’t want an auto bailout decision to be made on the basis of how much boost it’s going to give to economic activity in 2009. This is a problem that’s been a decade in the making and it will take a decade to sort it out. Different criteria should be applied to industry bailouts.
Q. One idea that’s being discussed in government circles is enhancing Employment Insurance benefits. Would you approve?
A. As long as what it’s doing, at the end of the day, is increasingly labour productivity. Most of the proposals that come up just make more people eligible, and probably have people sit in unpromising labour markets for even longer than they do.
Q. But if you give more money to people who have just lost their jobs, or folks who don’t earn much to begin with, they’ll surely spend it. Isn’t that as good a way as any to juice up the economy?
A. Social policy of all sorts you can obviously spend on. There are people coming from all over the place who thought these were a good idea a year ago, five years ago, and they’ll still, no matter how much money you put it, believe you should put in more money. The problem is making this temporary.When the economy is recovering at a good pace, are the politicians going to be able to remove it? It could be really difficult.
Q. How easy would it be to reverse a GST cut?
A. One would think it wouldn’t be overly difficult to say the cut was there as a stimulus and then remove it. But the feedback I’ve been getting is, ‘If you think politicians…’ And I say, in that case, don’t go near [a GST cut] with a ten-foot pole. It would be really a bad move if you couldn’t get it back up again and we’re stuck collecting even less revenue from the GST.
Q. You say the stimulus has to come fast. But if this recession is really deep and long, wouldn’t stimulus that rolls out more slowly, in the later stages of a prolonged slump, be equally worthwhile?
A. What they should do in this upcoming budget is get it in as soon as possible. If stimulus is still going to be there until mid-2010, that allows for an awful lot more bad news.
In our forecast, we certainly see the first quarter of next year as very negative. Second quarter, we see zero growth. Third quarter, probably slightly positive, and fourth quarter even a bit more positive. By 2010, we might be growing between two and three per cent, and 2011 should be a good recovery year.
Q. But what’s the harm in assuming things will be worse that you expect, and embarking on a longer stimulus program?
A. What would happen is the stimulus wouldn’t be doing what it was supposed to do, and we’d be building up a deficit. One of the acid tests of these [stimulus] proposals is they should be out of there by 2012-13. We could have had a decent pace of growth in 2010, 2011 and 2012. So if they are not out of there by then, they are needlessly adding to debt.