Deficit shocker

An unapologetic Prime Minister Stephen Harper defended his government’s oversized $16-billion miss on the federal deficit Wednesday and declared he is prepared to go even further in the hole if he sees fit to fight the recession.

Prime Minister Stephen Harper speaks in the House of Commons during Question Period in Ottawa on Tuesday.

OTTAWA — An unapologetic Prime Minister Stephen Harper defended his government’s oversized $16-billion miss on the federal deficit Wednesday and declared he is prepared to go even further in the hole if he sees fit to fight the recession.

A day after Finance Minister Jim Flaherty shocked Canadians by declaring the federal deficit will balloon to more than $50 billion this year — a 50 per cent hike from January’s $33.7 billion budget estimate — Harper brushed aside calls for his minister’s resignation, while signalling his willingness to spend more.

“The deficit has gone up because the recession is deeper,” said Harper in response to a question in the Commons.

“If the recession gets deeper, we will do more to help the unemployed and to help people.”

But economists warned Wednesday the government doesn’t need to spend more to widen the deficit — it will already balloon next year and likely the year after that beyond the budget’s now inadequate projections.

“If Flaherty thinks this a one-year phenomenon, I doubt that very much,” said Dale Orr, an independent economic consultant in Toronto.

TD Bank chief economist Don Drummond, a former finance official and one of Canada’s leading experts on the budget process, discounted Flaherty’s assertion that his government will return to balance in four years, saying it will take “many, many years” before Ottawa digs itself out of the deep hole it is digging.

Opposition critics also said they no longer believed the government’s numbers, citing numerous instances when the minister has had to backtrack.

“They’ve been lying across the board to Canadians on the deficit, on its size, on its scope and its effect on Canadians,” said NDP critic Thomas Mulcair.

Flaherty insisted he is not changing projections beyond this year.

He said Ottawa is still on track to record a $30 billion deficit next year and a $13 billion shortfall in 2011-2012. and to balance the budget in 2013-2014.

And he accused the opposition, particularly Liberal Leader Michael Ignatieff, for blowing the size of the deficit out of proportion. Although nominally a record, it represents about three per cent of the country’s economy, as opposed to deficits in the 1980s and 1990s that were twice that size.

“The deficit is affordable, it’s necessary for Canada, we’re doing the right things now,” he said in the Commons.

But many economists have long believed Flaherty has been overly optimistic in his financial projections, not only for the current fiscal year, but going forward.

One glaring area of dispute is the budget’s assumption that nominal gross national product — the value in current dollars of what Canadians produce — will grow by 4.3 per cent next year, and 6.4 per cent and 6.1 per cent in the following years.

If it turns out the rebound is weaker than expected, as almost all economists predict, that will have devastating impact on government revenues.

The vast majority of forecasts, including from the International Monetary Fund, call for a much more muted rebound starting next year. Bank of Canada governor Mark Carney has also recently proclaimed that Canada is entering a period of slower growth potential, even after the recession ends.

The government argues that the main reason for the larger deficit this year will be a one-time hit to rescue General Motors Canada (NYSE:GM) and Chrysler Canada, which could be in the $10 billion range. Industry Minister Tony Clement said a portion of any loan guarantees offered by Ottawa and 100 per cent of any equity stake in the battered auto companies will impact the deficit.

But Orr and other economists say the economic headwinds hitting the country now go beyond the auto bailout, and will squeeze the government’s books for several years.

Ottawa has only begun footing the unemployment benefits bill for the 321,000 Canadians who have lost their jobs since October, and the hundreds of thousands more who will be laid off in the next year or longer, the said.

That not only squeezes personal taxes paid to government, goods and services tax receipts, but also adds hundreds of millions or billions of dollars to employment insurance payments.

As well, the government will take a “hit” on corporate tax revenues for years to come, said Drummond.

Drummond predicted it will be many years before the federal government again balances its budget.

“If they just allow a normal spending growth path of four-to-five per cent and don’t change their tax rates, we will not get to a balanced budget for many, many years,” he said.

To get to balanced budget in the four years still being forecast by Flaherty, the government would have to cut spending increases to almost zero, or the economy would have to generate stratospheric growth rates.

“It’s easier to dramatically cut spending than it is to (produce) a low positive growth rate,” he explained. “If you look at history, either at the federal or provincial government, you will not find any sustained period where any government has run program spending (at low growth rates) for a sustained number of years.”

The Canadian Taxpayers Federation said that when all the numbers are finally tabulated, it is likely the federal government’s accumulated debt will rise by more than the $120 billion, wiping out more than a dozen years of debt repayment under both Liberal and Conservative governments, returning the country’s national debt to close to $600 billion.

That means Canadians will be paying higher debt service charges, but it also means Ottawa is likely through with meaningful tax cuts, or expanded social programs for many years to come.

The economists say Flaherty is correct on one score — that Canada’s deficit problems pale to what they were two decades ago, or to those of other industrialized countries.

This year’s deficit represents about three per cent of the size of the country’s economy of more than $1.5 trillion. By comparison, the United Kingdom has tabled a deficit equivalent of 10 per cent of their gross domestic product, while Washington’s US$1.75 trillion shortfall is 12 per cent of GDP.

As well, Canada’s debt to GDP remains among the lowest of industrialized nations and is less than half what it was when then finance minister Paul Martin vowed to eliminate the deficit “come hell or high water” in the mid-1990s.

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