Flaherty says stimulus could come if necessary, but economists warn against it
By Kristine Owram, THE CANADIAN PRESS
TORONTO - Finance Minister Jim Flaherty says his government is prepared to introduce a fiscal stimulus package if necessary in the 2009 budget, even if it means going into a deficit, but some economists say such a package could do more harm than good.
"I'm not a big fan of short-term stimulus packages," said Don Drummond, chief economist at TD Bank.
"They don't really generate very much short-term stimulus and they very quickly become long-term structural problems."
Flaherty has said the Tories will only introduce new measures to revive the economy if they deem it absolutely necessary.
"Of course I hope the economy will be strong and we won't need to have any additional stimulus in the Canadian economy, but if it's necessary to do so, we will do so," Flaherty told reporters after a Friday speech in Toronto.
Flaherty's comments came as the Liberal Opposition prepared a motion of non-confidence in the Conservative minority government, which precipitated a political crisis Friday in Ottawa.
The Liberal motion, backed by the NDP and Bloc Quebecois, said Parliament has lost confidence in the Tories "in light of the government's failure to recognize the seriousness of Canada's economic situation and its failure in particular to present any credible plan to stimulate the Canadian economy and to help workers and businesses in hard-pressed sectors such as manufacturing, the automotive industry and forestry."
But Drummond said the economic slowdown wasn't created in Canada and therefore can't be solved in Canada.
"The best thing for the Canadian economy is to get the world economy going," he said.
"Canada is not the problem - we're the only developed economy in which employment and consumption are still rising. Our economy's been hit by international events, not by domestic events."
Flaherty said in his mid-year economic update Thursday that Canada will fall into a technical recession - two consecutive quarters of negative economic growth - in the current quarter and the first three months of 2009.
Overall, Flaherty said the economy will shrink by one per cent in the current quarter, another 0.4 per cent in the January-March period and grow a paltry 0.3 per cent for all of 2009.
He has said the government has already done plenty to stimulate the Canadian economy, including cutting corporate taxes, reducing the GST and increasing spending on infrastructure.
In sticking to traditional Conservative values, Flaherty is doing what he can to avoid a deficit, but has acknowledged that a fiscal stimulus package could be necessary if the economy worsens.
Flaherty was vague Friday on what measures such a stimulus package could include.
"There are lots of issues," he said. "More spending on infrastructure - there are lots of possibilities to stimulate the economy."
But Drummond cautioned against doing "anything under the guise of short-term stimulus that doesn't need to be done for longer-term interests."
For example, temporary tax cuts are often nearly impossible politically to reverse, and while spending on infrastructure can be beneficial, it takes a long time for major developments to be approved.
"Most of the infrastructure you would mount right now isn't going to hit the economy until 2011 or 2012 and hopefully we'll be recovered by that point," Drummond said. "In fact, we may even be facing an inflation problem again at that point."
Some have called on the government to develop a rescue package for the struggling automotive industry. The Detroit Three automakers have asked the U.S. government for US$25 billion to help them stay afloat amid slumping sales and tight credit markets, but the American government has expressed reluctance to bail out the auto giants.
Jack Carr, an economist at the University of Toronto, said the Canadian government should be similarly wary.
"I'm not in favour of a big stimulus package, particularly if it involves bailing out losers. Rewarding losers is not a way to compete in this global economy," he said.
He added that the Canadian operations of international automakers, such as Toyota and Honda, are doing just fine, and he doesn't think General Motors, Chrysler and Ford should receive special treatment.
Craig Wright, chief economist with Royal Bank, said whatever initiatives are introduced need to encourage productivity.
"We have to do something to turn around productivity in Canada," Wright said.
He added that it was encouraging to see government trimming some of its own costs, and encouraged Flaherty to allow for freer movement of goods and labour across provincial borders.
But he cautioned against acting too quickly, saying the Canadian government should wait and see what its counterpart south of the border does before making any major decisions.
"If the U.S. doesn't do anything and we do something, the impact would be modest at best," he said.
But Drummond said waiting to implement a stimulus package will, in essence, make it futile.
"By the time this world fiscal stimulus hits the road, the economies will probably already be in recovery," he said.
"That's why these things never work. They're supposed to be counter-cyclical and they end up being pro-cyclical."
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