BUSINESS
08/12/2011 01:32 EDT | Updated 10/12/2011 05:12 EDT

Harper Government Austerity Plan: Economists Cast Wary Eye On Promise Of Budget Cuts

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Despite renewed global economic unrest, Prime Minister Stephen Harper took a break from his trade mission to Latin America to affirm Ottawa’s promise to go ahead with $4 billion in annual spending cuts in a bid to eliminate the budget deficit by 2015. But the promise is meeting mixed reaction from economists, some of whom warn that cleaning up Canada’s balance sheet now is a risky play.

In an apparent bid to quell any doubts about whether Ottawa would re-think its deficit-slashing timeline, Harper told reporters Thursday that stimulus is not currently on the table.

“It continues to be our view that the Canadian economy will grow; it will grow gradually and slowly, along with the world recovery,” he said. “As long as those remain the circumstances, the policy mix of the government of Canada is the appropriate one.”

According to TD Economics Chief Economist Craig Alexander, Harper’s announcement was an effort to send “a strong message” to the international community about the importance of fiscal prudence.

“What we’re seeing in international markets is loss of confidence in the ability of the U.S. government and European governments to deal with their fiscal situation,” he says. “I think that the government of Canada in part is providing a leadership example to the other countries.”

But while Alexander agrees with Ottawa’s stance on fiscal stimulus for the time being, he says that he doesn’t believe the announcement would preclude Ottawa from being “reactive to Canadian economic circumstances.”

“While they’ve said that they’re not prepared to provide any new fiscal measures at this time, if the economy were to experience a renewed contraction, I have no doubt that the government would reassess its position and consider new actions to help the economy,” he says.

But others say that Harper’s business-as-usual approach is ill-advised.

According to David Macdonald, a research associate at the Canadian Centre for Policy Alternatives, “It bodes badly for the Canadian economy that the government is committed come hell or high water to reduce spending.”

“It’s too bad that there isn’t a more flexible plan, irrespective of whether Canadians are out of work, irrespective of whether economic growth is anemic, irrespective of whether we even need to cuts to balance the budget,” says Macdonald. “What it means is a whole bunch more people are going to lose those jobs … People who don’t have those jobs are not going to be spending in the economy, so you’re pushing up the unemployment rate at the same time as you’re driving down economic growth,” he says.

University of Ottawa economist Mario Seccareccia expresses similar concerns.

As Seccareccia sees it, in an environment where everyone from households to corporations is cutting back, government is the only sector that can sustain increased spending -- a necessary evil, he says, to keep the gears of the financial system turning.

“In order to have growth in an economy, you need to have some sector of the economy go into debt, and the question is, who is going to hold that hot potato of debt?” he says. “We have a federal government that’s telling us that we’ve got to get our fiscal house in order, but to do that you’re going to destabilize the economy. It’s like wrecking all your neighbourhood so you can get your house in better shape.”