Stephen Harper Recession Plan Could Be Short On ammo, Say Analysts

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Analysts warn a second slump now or in the near future may not look anything like the 2008-09 financial crisis.
Analysts warn a second slump now or in the near future may not look anything like the 2008-09 financial crisis.

OTTAWA - Stephen Harper says Canadians can rest assured the government has a Plan B in place should another recession strike.

But analysts warn a second slump now or in the near future may not look anything like the 2008-09 financial crisis that wound up setting Canada's economy back 3.3 per cent, shuttering plants and idling 430,000 workers.

It may be worse, they say. And if it is, neither Ottawa, the provinces, nor the Bank of Canada have as many bullets to fire at the problem as four years ago.

TD Bank economist Craig Alexander noted that another global recession stemming from a financial system breakdown in Europe is still not the most likely outcome, although it is not to be dismissed.

Perversely, he said, it may happen because it's the only thing that can get European leaders to take appropriate action.

"The Germans don't want to bail out the others and set up an ongoing fiscal transfer union, but that's where they need to go. The others want to limit the amount of sovereignty over fiscal policies they have to turn over to Germany, but that's where they need to go," he explained.

"The real conundrum is that you may actually need a financial crisis to force them to do the things they don't want to do."

In his interview with CBC on Tuesday night, the prime minister said he realizes a financial meltdown in Europe would send shockwaves across the world and eventually hit Canada. He referred back to 2008, when a U.S.-centred financial crisis froze inter-bank lending, panicked markets, sapped confidence and ultimately set off a chain of events that resulted in the worst global recession since the big one in the 1930s.

"We do have contingencies in place to minimize the impact on us as we did in '08-'09," he added, offering few details.

Economists say there is little new in terms of a plan and what Harper is likely talking about is a reprise of the hastily-cobbled together 2009 "Economic Action Plan" budget.

Along with the provinces, Ottawa injected $52 billion of two-year stimulus by way of construction projects, home renovation and other tax credits, more generous employment insurance rules, job sharing programs, and business tax cuts. On the finance side, Ottawa helped free up credit by offering to take up to $125 billion of mortgage assets off bank books, while the Bank of Canada reduced the cost of borrowing for firms and households by slashing its overnight rate from 4.5 per cent in late 2007 to a then unheard of 0.25 per cent.

It worked, if imperfectly, said Doug Porter, deputy chief economist with BMO Capital Markets.

Canada's recession lasted about nine months — a shorter duration than in most advanced nations. And job losses in relative terms were half those in the U.S.

But doing a 'stimulus budget, the sequel' won't be as easy, Porter added.

"Obviously we're starting from a different point," he noted. "We headed into a recession last time with much higher interest rates and with a budget surplus."

The Bank of Canada can still take its policy rate from the current one per cent back to 0.25, but the impact on real-world interest rates won't be nearly as pronounced since they are already at near-historic lows.

That would leave the heavy lifting up to governments. But in Ottawa and many provincial capitals, particularly Ontario and Quebec, the cupboard is, if not bare, at least depleted. Ottawa is currently running about $24 billion under balance, while the fiscal positions of the country's two biggest provinces — where the recession would be most brutal — are worse.

"There's obviously only so much we can do on the fiscal side before we tip over to the other side and serious deficit and debt problems," Porter noted.

Ottawa's $600-billion debt as a slice of gross domestic product is about 35 per cent, but if provincial debt is included, that figure rises to a not so safe zone approaching 70 per cent — and as politicians are fond of saying, there is only one taxpayer to wring revenues from.

Still, David Madani of Capital Economics says the credit door is open to the Canadian government more than for many other countries.

"Should more government support be needed, they have the scope to do that without worrying investors, we're regarded as a safe haven," he said.

Analysts say one of the actions governments would likely take first is to cancel austerity programs and place a longer time-horizon on plans to balance budgets.

For Ottawa, that would likely mean delaying implementation of employment insurance changes envisioned for an economy facing what Finance Minister Jim Flaherty called "unprecedented job shortages" in some sectors and regions.

Instead, the government may want to make EI more generous, expand job-sharing, and freeze or reduce payroll taxes.

One of the best ways to cushion people from an economic shock, says Porter, is to put money in their pockets, especially those most affected.

"I think we could learn a few lessons from what Germany did (in 2008-09)," said Porter. "They leaned heavily on job-sharing and some wage subsidies to maintain employment. That helps maintain consumer confidence and incomes."

Infrastructure is the go to measure for most governments in bad times, for the simple reason that it is an investment for the future and directly creates jobs in the present.

Toronto economic consultant Dale Orr says the problem with the approach this time is there would be fewer "shovel ready" projects to tackle because many have already been done.

Alexander suggested one alternative would be more targeted, long-term projects, such as a new Canada-U.S. bridge at Windsor, Ont., although they have the disadvantage of requiring a lengthy pre-construction periods.

Orr would favour tax reductions weighted to lower income Canadians, who are likely to spend the extra cash.

One program unlikely to be brought back is the home renovation tax credit, some say. While it was immensely popular, the last thing Ottawa should encourage at this time is for households to take on more debt.

Most economists take the government at its word when it says it would be willing to again step into the breach in case of another emergency. But it may go into the trenches with less ammo, they add.

"I think the government would respond with some fiscal stimulus, but it would have to be quite targeted and more limited," said Alexander.

"I don't think we could have the big stimulus plans that we had the last (time), the cost of that would create enormous problems down the road."

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