Canada Budget 2012: Economists Tell Flaherty Economic Downturn Less Likely

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JIM FLAHERTY
Economists have told Jim Flaherty that the risk of an economic downturn have diminished. | CP

OTTAWA - Finance Minister Jim Flaherty faces a less bumpy road in seeking to balance the budget in four years, according to economists who briefed the minister Monday in advance of his March 29 budget.

Economists from Canada's leading financial institutions told the minister at a meeting that Ottawa will likely have a little more cash to spend than projected last fall.

And in another welcome development, the analysts said global risks had subsided somewhat from the last time they had briefed in the fall — when Flaherty increased the contingency fund for downward surprises.

"It's fair to say that some of the risks we were worried about last year don't seem quite as shocking as we go into the current year," said CIBC chief economist Avery Shenfeld.

Flaherty said he remains worried about Europe, where several governments face severe debt levels, but he's more optimistic about the U.S. economy and encouraged by Canada's gross domestic product.

A Statistics Canada report released Friday showed GDP growth returned in December. It also upgraded third-quarter expansion to a strong 4.2 per cent.

That puts the Canadian economy on a stronger footing and, if carried forward, would result in about $4 billion or $5 billion more government revenues by 2015, said TD Bank economist Derek Burleton.

The 13 economists did not give Flaherty a new growth projection for this year, but several who spoke to reporters after the meeting said it would likely be slightly higher than the 2.1 per cent consensus used for November's fall update report. Flaherty will get the new consensus next week after the forecasters have had time to plug in the new GDP data.

"We're going to follow up with the economists because the numbers last Friday were relatively encouraging," said Flaherty. "We try to be as 'au courant' as possible when we do the budget in terms of the prognostications."

In a new report Monday, the Conference Board's help-wanted index showed a modest pick-up from previous months, suggesting Friday's jobs report will show an 11,500 employment gain for the month of February. That is better than January's 2,300 increase, but below levels that would be regarded as healthy.

"This increase would continue the slow pace in employment growth recorded over the past six months as Canadian employers adopt a more prudent hiring pace in the face of global financial and economic uncertainties," the board said in its report.

The prime minister and federal ministers have been warning for months the upcoming budget will take steps to tackle the deficit, both short-term and long-term. In the short-term, the government has announced plans to cut spending by between $4 billion and $8 billion, while long-term, it has said it will strive to restrain growth in elderly benefits such as the Old Age Security program.

Bank of Montreal economist Douglas Porter has cautioned Ottawa about overdoing austerity given the fragile nature of the economy, but on Monday Porter said a $4 billion trim in spending would not have a serious impact.

In response to a question, Flaherty continued to describe his measures as moderate.

"We don't need to be draconian...we are not in the situation of Greece or Portugal," he said.

He did not have the same advice for provinces, singling out Ontario — where he was once finance minister — as a government that has overspent and is now faced with a "fundamental budgeting problem."

A recent report from economist Don Drummond has advised the Liberal McGuinty government to adopt a host of initiatives to reduce spending.

Asked about Ontario's suggestion that it may seek to scrap tax writeoffs for firms that buy hockey tickets to entertain clients, Flaherty essentially told the province to get serious about its problems.

"I'm not into scapegoats," he said. "Ontario has fundamental budgeting problems. They have major spending problems built up over the last few years."

NDP critic Peter Julian said Canadians shouldn't be fooled by Flaherty's assertion the budget would not be draconian.

"The problem is that if we do look at the cuts that the government was talking about a few months ago, they are draconian and we are talking about significant job losses and we are talking about pushing this country ... into potentially a worse economic situation," he said.

While external risks have diminished, particularly in the U.S., and to a lesser extent even in Europe, Flaherty said he is still somewhat concerned about Canada's housing market.

He described economists' views on housing and household debt as divergent.

"I remain concerned about the condo market, quite frankly," he said.

"Interest rates are relatively low, so I again encourage Canadians to be careful in the amount of debt they take on in terms of residential mortgages because rates will go up some day and I would not want people to get caught."

TD's Burleton said he would like the government to reduce the maximum amortization period on mortgages to 25 years from 30 in order to dampen demand, particularly the condo markets in Toronto and Vancouver.

Others disagreed, however, noting the sales and prices were flattening. Porter said the market is overheated in only two cities, and that house prices were overall fundamentally sound.

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