The debate around short-term stimulus: where will Canada stand? - Macleans.ca

The debate around short-term stimulus: where will Canada stand?

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Back in the panic-stricken fall of 2008, the G20 emerged as the saviour of the global economy, with Canada joining in as the major economies joined forces to ramp up spending and keep an international recession from deepening into a depression.

Simpler times.

In the run-up to the G20 finance ministers’ meeting later this month and the leaders’ summit in early November, there’s no sign of that sort of unity of purpose. The fundamental divide: stimulus doves vs. austerity hawks. Finance Minister Jim Flaherty this week continued to position Canada squarely in the latter camp:

“In the absence of an external shock to the Canadian economy, we’re on the right track. Accumulating deficits and creating a large public debt over time is the worst thing you can do to an economy and to the people of a country, and we have no intention of going in that direction.”

Now, it’s important to note that Flaherty gives himself room to switch course, but only “if we had some sort of world recession.” So basically he’s saying the Canadian government would turn to stimulus spending only in response to a recession, not as a measure to stave one off. Similarly, his British counterpart has lately ruled out both stimulative spending hikes and tax cuts, saying, “Right now, temporary tax cuts or more spending are two sides of exactly the same coin, a coin that has to be borrowed—more debt that has to be paid off.”

But other voices are sounding the alarm. Today the International Monetary Fund warned of a possible European recession, which could spread, and urged governments that aren’t in the worst fiscal shape to ease off on shrinking their deficits. The IMF says deficit-cutting “should not come at the expense of risking a widespread contraction in economic activity” and countries with relatively strong balance sheets “should consider delaying some of their fiscal consolidation.”

Canada would surely count as a country with a manageable deficit. The issue, it seems to me, is whether Flaherty and Prime Minister Stephen Harper will want to play ball if the G20 settles on some sort of moderate stimulus program in the next few weeks. Given the Harper government’s heavy investment in making Canada a credible player at the G20 and G8 tables, I wouldn’t have thought they would want their government to be seen as an outlier.

And, after all, the case for short-term stimulus for the sake of shoring up the world ecnonomy, combined with credible medium-term plans to rein in deficits, is solid. The Economist sums it up this week, criticizing politicians who place “overwhelming emphasis on short-term fiscal austerity over growth,” and concluding that  “the collective obsession with short-term austerity across the rich world is hurting.”