The government ignored early signs of bad times

A prudent government would have started building less upbeat projections into its planning far sooner

The federal government’s standard line on why they took so long to react to the economy’s plunge into recession, and why they denied until the last possible moment that massive deficits were looming, is that nobody saw the dark clouds gathering.

Ted Menzies, Finance Minster Jim Flaherty’s parliamentary secretary and increasingly the Tories’ main voice on the economy, shot back at the Liberals yesterday, “As much as members of the opposition would like to suggest that they knew what was coming, they knew nothing more about what was coming than anybody did.”

It’s true that there was no consensus forecast, through most of last year, that saw Canada suffering a deep recession in 2009, and a return to staggering deficits in Ottawa. However, it’s false to suggest that danger signals were utterly absent from reputable projections last year.

In fact, the Prime Minister himself (as he boasts when it suits his purposes) explicitly warned of rough economic days ahead in his year-end interviews in the final days of 2007, so much so that we headlined our take on his message “Not-so-happy New Year.”

The following month, Marc Lee of the left-leaning Centre for Policy Alternatives became the first economist I know of to explicitly flag the strong possibility of a return to deficits, in a CCPA report that didn’t get the attention it deserved at the time.

By the time of the February 2008 budget, though, the possibility of a deficit was clear. The consensus view among close observers of the federal fiscal situation was that Flaherty had left himself vulnerable should the economy weaken, which was looking increasingly likely. “The door is wide open to have a budget deficit if things switch from bad to worse,” Clement Gignac, chief economist at National Bank Financial, was quoted as saying by the Globe and Mail.

By spring, I was hearing enough talk of a return to deficits to write this feature on the prospect for Maclean’s, in which I reported that economists expected deficits, but small, temporary ones (ah, for those innocent, optimistic days…). The big issue was how much red ink might damage Conservative political fortunes, a question that was obviously also worrying Tories.

In June the Organization for Economic Cooperation and Development downgraded its outlook for the North American economy, including its growth forecast for Canada. The OECD still didn’t see an outright recession in the offing for Canada but did warn that “the general government fiscal balance may show a small deficit as well, as both tax cuts and the business cycle eat into government revenues.”

Come the fall, of course, the financial meltdown made what had looked pessimistic in the spring seem rosy in retrospect. By the time the election got rolling in September, mainstream media reports, like this CBC piece, “Are deficits in our near future?”, should have left little doubt about the possibility.

Well before Canadians voted on Oct. 14 it was becoming very difficult for Stephen Harper to maintain his campaign stance that Canada was not facing a recession and the government would not run a deficit. More than a week before election day, for example, Scotiabank’s economists forecast recessions for both Canada and the U.S.

Nobody can reasonably expect governments to see the future. What they can expect is for reasonable assumptions, even cautious ones, taking into account accumulating evidence. That’s not what we got last year, which led to the economic policy scramble of early 2009. A prudent government would have started building less upbeat projections into its planning far sooner.