OTTAWA - The federal government will take a "significant" hit from Canada's weaker economic growth prospects, but will still be able to balance the books in time for the next election in 2015, Finance Minister Jim Flaherty said Friday.
Flaherty delivered the message after meeting with about a dozen private sector economists who travelled to Ottawa to warn that 2013 will be weaker than expected.
The government did not release a new consensus figure, but interviews with the economists showed their projections range from a low of 1.5 per cent to a high of 1.8 per cent. That's below the two per cent advance Ottawa had counted on for the November update and well south of the 2.4 per cent projection contained in last spring's budget.
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Debt as a percentage of GDP: 80.9 percent General government debt: $1.99 trillion GDP per capita (PPP): $35,860 Nominal GDP: $2.46 trillion Unemployment rate: 8.4 percent Credit rating: Aaa Although the UK has one of the largest debt-to-GDP ratios among developed nations, it has managed to keep its economy relatively stable. The UK is not part of the eurozone and has its own independent central bank. The UK's independence has helped protect it from being engulfed in the European debt crisis. Government bond yields have remained low. The country also has retained its Aaa credit rating, reflecting its secure financial standing. Read more at 24/7 Wall St.
Debt as a percentage of GDP: 81.8 percent General government debt: $2.79 trillion GDP per capita (PPP): $37,591 Nominal GDP: $3.56 trillion Unemployment rate: 5.5 percent Credit rating: Aaa As the largest economy and financial stronghold of the EU, Germany has the most interest in maintaining debt stability for itself and the entire eurozone. In 2010, when Greece was on the verge of defaulting on its debt, the IMF and EU were forced to implement a 45 billion euro bailout package. A good portion of the bill was footed by Germany. The country has a perfect credit rating and an unemployment rate of just 5.5 percent, one of the lowest in Europe. Despite its relatively strong economy, Germany will have one of the largest debt-to-GDP ratios among developed nations of 81.8 percent, according to Moody's projections. Read more at 24/7 Wall St.
Debt as a percentage of GDP: 85.4 percent General government debt: $2.26 trillion GDP per capita (PPP): $33,820 Nominal GDP: $2.76 trillion Unemployment rate: 9.9 percent Credit rating: Aaa France is the third-biggest economy in the EU, with a GDP of $2.76 trillion, just shy of the UK's $2.46 trillion. In January, after being long-considered one of the more economically stable countries, Standard & Poor's downgraded French sovereign debt from a perfect AAA to AA+. This came at the same time eight other euro nations, including Spain, Portugal and Italy, were also downgraded. S&P's action represented a serious blow to the government, which had been claiming its economy as stable as the UK's. Moody's still rates the country at Aaa, the highest rating, but changed the country's outlook to negative on Monday. Read more at 24/7 Wall St.
Debt as a percentage of GDP: 85.5 percent General government debt: $12.8 trillion GDP per capita (PPP): $47,184 Nominal GDP: $15.13 trillion Unemployment rate: 8.3 percent Credit rating: Aaa U.S. government debt in 2001 was estimated at 45.6 percent of total GDP. By 2011, after a decade of increased government spending, U.S. debt was 85.5 percent of GDP. In 2001, U.S. government expenditure as a percent of GDP was 33.1 percent. By 2010, is was 39.1 percent. In 2005, U.S. debt was $6.4 trillion. By 2011, U.S. debt has doubled to $12.8 trillion, according to Moody's estimates. While Moody's still rates the U.S. at a perfect Aaa, last August Standard & Poor's downgraded the country from AAA to AA+. Read more at 24/7 Wall St.
Debt as a percentage of GDP: 97.2 percent General government debt: $479 billion GDP per capita (PPP): $37,448 Nominal GDP: $514 billion Unemployment rate: 7.2 percent Credit rating: Aa1 Belgium's public debt-to-GDP ratio peaked in 1993 at about 135 percent, but was subsequently reduced to about 84 percent by 2007. In just four years, the ratio has risen to nearly 95 percent. In December 2011, Moody's downgraded Belgium's local and foreign currency government bonds from Aa1 to Aa3. In its explanation of the downgrade, the rating agency cited "the growing risk to economic growth created by the need for tax hikes or spending cuts." In January of this year, the country was forced to make about $1.3 billion in spending cuts, according to The Financial Times, to avoid failing "to meet new European Union fiscal rules designed to prevent a repeat of the eurozone debt crisis." Read more at 24/7 Wall St.
Debt as a percentage of GDP: 101.6 percent General government debt: $257 billion GDP per capita (PPP): $25,575 Nominal GDP: $239 billion Unemployment rate: 13.6 percent Credit rating: Ba3 Portugal suffered greatly from the global recession -- more than many other countries -- partly because of its low GDP per capita. In 2011, the country received a $104 billion bailout from the EU and the IMF due to its large budget deficit and growing public debt. The Portuguese government now "plans to trim the budget deficit from 9.8 percent of gross domestic product in 2010 to 4.5 percent in 2012 and to the EU ceiling of 3 percent in 2013," according Business Week. The country's debt was downgraded to junk status by Moody's in July 2011 and downgraded again to Ba3 on Monday. Read more at 24/7 Wall St.
Debt as a percentage of GDP: 108.1 percent General government debt: $225 billion GDP per capita (PPP): $39,727 Nominal GDP: $217 billion Unemployment rate: 14.5 percent Credit rating: Ba1 Ireland was once the healthiest economy in the EU. In the early 2000s, it had the lowest unemployment rate of any developed industrial country. During that time, nominal GDP was growing at an average rate of roughly 10 percent each year. However, when the global economic recession hit, Ireland's economy began contracting rapidly. In 2006, the Irish government had a budget surplus of 2.9 percent of GDP. In 2010, it accrued a staggering deficit of 32.4 percent of GDP. Since 2001, Ireland's debt has increased more than 500 percent. Moody's estimates that the country's general government debt was $224 billion, well more than its GDP of $216 billion. Moody's rates Ireland's sovereign debt at Ba1, or junk status. Read more at 24/7 Wall St.
Debt as a percentage of GDP: 120.5 percent General government debt: $2.54 trillion GDP per capita (PPP): $31,555 Nominal GDP: $2.2 trillion Unemployment rate: 8.9 percent Credit rating: A3 Italy's large public debt is made worse by the country's poor economic growth. In 2010, GDP grew at a sluggish 1.3 percent. This was preceded by two years of falling GDP. In December 2011, the Italian government passed an austerity package in order to lower borrowing costs. The Financial Times reports that according to consumer association Federconsumatori, the government's nearly $40 billion package of tax increases and spending cuts will cost the average household about $1,500 each year for the next three years. On Monday, Moody's downgraded Italy's credit rating to A3, from A2. Read more at 24/7 Wall St.
Debt as a percentage of GDP: 168.2 percent General government debt: $489 billion GDP per capita (PPP): $28,154 Nominal GDP: $303 billion Unemployment rate: 19.2 percent Credit rating: Ca Greece became the poster child of the European financial crisis in 2009 and 2010. After it was bailed out by the rest of the EU and the IMF, it appeared that matters could not get any worse. Instead, Greece's economy has continued to unravel, prompting new austerity measures and talks of an even more serious default crisis. In 2010, Greece's debt as a percent of GDP was 143 percent. Last year, Moody's estimates Greece's debt increased to 163 percent of GDP. Greece would need a second bailout worth 130 billion euro -- the equivalent of roughly $172 billion -- in order to prevent the country from defaulting on its debt in March. Read more at 24/7 Wall St.
Debt as a percentage of GDP: 233.1 percent General government debt: $13.7 trillion GDP per capita (PPP): $33,994 Nominal GDP: $5.88 trillion Unemployment rate: 4.6 percent Credit rating: Aa3 Japan's debt-to-GDP ratio of 233.1 percent is the highest among the world's developed nations by a large margin. Despite the country's massive debt, it has managed to avoid the type of economic distress affecting nations such as Greece and Portugal. This is largely due to Japan's healthy unemployment rate and population of domestic bondholders, who consistently fund Japanese government borrowing. Japanese vice minister Fumihiko Igarashi said in a speech in November 2011 that "95 percent of Japanese government bonds have been financed domestically so far, with only 5 percent held by foreigners." Prime Minister Yoshihiko Noda has proposed the doubling of Japan's 5 percent national sales tax by 2015 to help bring down the nation's debt. Read more at 24/7 Wall St.
"How much of a kick are we going to take on the revenue side because of lower nominal GDP? Significant. It’s significant,” said Flaherty during a question-and-answer period.
Still, the minister said the government is on track to balance the budget by the fall of 2015 and plans to close tax loopholes, like foreign havens used by people to avoid taxes.
It also plans on controlling spending to make up the difference.
"We will manage it," said Flaherty. "The key is looking forward to the next two years and making sure we stay on track. There's a number of measures we can take to do that and you'll see them in the budget."
The minister has talked before about cutting discretionary spending to realize his target, and he repeated the message Friday, saying he will "focus like a laser" on the spending he can control. He insisted he will not raise taxes or cut transfers to provinces.
Economists who spoke after the minister said they did not believe mild austerity from Ottawa will damage the recovery, but most appeared against anything drastic.
"Given the fact that a lot of the provinces are moving into pretty serious restraint, it probably would be unwise for the federal government to step on the brake further than they already have," said Bank of Montreal chief economist Doug Porter.
There is no compelling economic necessity to hit the 2015 target as long as the deficit keeps decreasing, they said, but that might be a hard political pill for the government to swallow.
Prime Minister Stephen Harper campaigned in 2011 on the promise to introduce partial income-splitting to reduce taxes on families, as well as to double the popular tax-free savings accounts, but only once the deficit is eliminated. Politically, the Conservatives would much prefer to campaign on a promise fulfilled than a promise closer to being fulfilled in 2015.
CIBC chief economist Avery Shenfeld said he believes Flaherty can meet his target if the economy behaves. He said the real weakness occurred in the last half of 2012 — when growth fell to an average 0.7 per cent annualized — but that he expects a better 2013 and 2014 once the global recovery, and the U.S. in particular, picks up steam.
That is in keeping with the latest indicators, including a report that both Canada and the U.S. had a stellar job creation month in February, adding 50,700 and 236,000 workers respectively.
"The real challenge will be for Canada if the global economy doesn't pick up by 2014," warned Shenfeld. "We're going to depend on the kindness of strangers... we need the rest of the world to be growing faster to push business investment spending in areas like resources."
With little money in hand, Flaherty's budget will more likely be one of fine tuning rather than dramatic new programs or shifts in direction.
One area of priority, said the minister, will be making sure Ottawa gets better results for the approximately $2.5 billion it transfers to provinces and territories for skills training.
Despite about 1.3 million people actively looking for work, and an unemployment rate of seven per cent, there are still jobs going wanting in the resource industries of Alberta and Saskatchewan, and even in some industries in Ontario.
Flaherty has highlighted in the past the need to train Canadians for the jobs that are available, but Friday appeared to shoot down some media reports he was about to take back the responsibility for skills training and the money that goes with it. Instead, he suggested Ottawa would become more interventionist in how the programs are administered, and demand accountability.
"I think it's important we work with the provinces and territories on skills training broadly defined," he said. "Having said that, there's no question that the delivery of those kinds of services generally are better placed with the provinces and territories.
"What we are looking at though is outcomes. Are we seeing the kind of employment and outcomes that we expected to see, what is the degree of accountability? We've got to do a better job of connecting the skills people have, the education people have, with the jobs that are available in Canada."
Experts on the issue have tended to identify the proliferation of liberal arts courses offered at Canadians universities, as opposed to scientific and technical training, as the major reason for the skills mismatch in the labour force, rather than specific add-on training offered by provinces.
TD Bank chief economist Craig Alexander said certain groups in the country are woefully under-represented in the labour market, including youth, immigrants and Aboriginal Canadians. But it shouldn't just be up to governments to solve the problem, he added.
"When you hear the business community constantly harping on the fact the university system isn't generating the workers with the skills they need, at some point the answer is businesses also have to do their part."
Flaherty said Canadians will need to wait for the budget, expected in late March, for specific details on his approach. The one certainty, he said, is that Ottawa will not cut funding for skills training.
"It's too important," he said. "It's a priority of the budget."