OTTAWA — The world will pay a stiff price in future years for current massive government spending aimed to avert an even greater economic disaster, TD Bank’s chief economist Don Drummond says.
Testifying before the parliamentary finance committee Thursday morning, the former finance department official estimated it will take many years for the economy to return to what many would consider normal.
“I think there’s going to be a lot of difficulties. I think there is going to be a slight recovery in 2010, 2011 and then, after that, I think there’s going to be a very protracted period over several years to address the problems that are arising now,” he said.
Drummond, who recently projected the Canadian government’s deficit would hit $82 billion over the next two years — about $18 billion more than Finance Minister Jim Flaherty projects in the budget — said he sees the economy limping along with meagre growth of between two and 2.5 per cent until 2015.
Still, Drummond said government interventions in the economy likely averted an even greater disaster.
”If they had done nothing and we had the policy response we had in the Great Depression, that’s what exactly what we would have had, another Great Depression,” he said.
”I still think there’s a lot of risk still out there, but we’re putting the pieces in place to see it recover by 2010.”
The price of ramped up government spending could trigger runaway inflation once economies rebound.
To prevent this, central banks will be left with no choice but to ramp up interest rates thereby causing a second problem, dampening economic growth, Drummond said.
And governments will have to drastically cut down on spending. Ottawa may need to cut program expenditure increases from the pre-recession norm of about six per cent a year to about two per cent.
”I don’t think they necessarily have to do what Paul Martin did in 1995 and 1996 and actually cut the level (of spending), but they are going to have ramp it down to about two per cent and the provinces will have to do that sort of thing too, and we’re not used to that sort of discipline and making tough decisions,” Drummond said.
The problem will be even more acute in the United States, which Conference Board economist Glen Hodgson told the committee has already poured about US$10 trillion into their economy, far more than Canada on a comparison basis.
Wednesday’s committee testimony on the economy from parliamentary budget officer Kevin Page — along with Thursday’s analysts from the TD Bank, C.D. Howe Institute, the Conference Board of Canada and the Canadian Federation of Independent Business — provided a sobering re-assessment of the assumptions of January’s federal budget.
Although there were some variations — Drummond was more pessimistic than Page on the economy and deficit, and the Conference Board’s Hodgson more rosy — there was uniformity in the view that the two-month old federal budget was already out of date.
A consensus has formed that the economy will fall about twice as far as the budget predicts for this year and will grow much slower in the outgoing years, causing the deficit projections to be billions of dollars off target.
”You might as well throw them in the garbage,” said Liberal finance critic John McCallum of the budget projections.
McCallum accused Tory MPs of hiding from the truth and punishing the parliamentary budget officer by cutting his budget simply for being the messenger of bad news.
”I think this is a vengeful government that is punishing Mr. Page because he is embarrassing them by telling Canadians the truth,” he said.
In Wednesday’s hearings, several Tory MPs suggested Page should be more even handed and also talk about the good things happening in the economy.
Drummond, although he appeared unaware of the context, defended the bringers of bad tidings.
”Cheerleading can maybe influence behaviour in the economy for a month or two, but when it works out differently it just comes crashing down,” he said.
While every finance minister wants to spread the good news, Drummond cautioned that, when the situation turns they wind up ”looking foolish.”
The witnesses agreed that a key to restoring growth lies with improving the availability of credit to businesses.
Canada has not had to bail out the banks, but has injected credit through the Bank of Canada and by buying up mortgages. In the budget, Ottawa said it will create a $12 billion facility help auto leasing and loans.
The program was praised by Finn Poschmann of the C.D. Howe Institute, but he said it will likely have to be expanded. He also said it’s critical that it be implemented quickly, by June at the latest, to spur vehicle sales.
The witnesses said the extraordinary programs haven’t as yet restored normalcy to credit markets, but added they believed they will work given sufficient time.
“We’re frankly in a grand experiment right now, none of us have ever seen this before,” said Hodgson.
“What I see the U.S. government is doing is almost experimenting, they try something and if it doesn’t work, they move on. I think we’re on the right path as governments learn by doing, but we really don’t know what the end station is.”
Drummond said if the latest US$1-trillion plan to buy up toxic assets from the U.S. banks works, it will restore confidence and growth.
But if it doesn’t, ”We’re going to be in trouble for a long time.”