Agency less optimistic over speed of recovery from recession

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OTTAWA - The Harper government's plan for a quick economic recovery and return to balanced budgets is being cast into doubt by new evidence that Ottawa may have misjudged the severity of the global recession.

A day after Finance Minister Jim Flaherty tabled a budget projecting that the global and Canadian economies will rebound moderately next year, the International Monetary Fund has thrown a spanner into the assumptions that underpin the government's numbers.

The latest global outlook is in line with Canadian economic expectations in Flaherty's budget for this year -- a 1.2 per cent gross domestic product retreat -- but the two part company over the expectations for next year.

The IMF says Canada's economy will begin to grow at a tepid 1.6 per cent pace, while Flaherty is counting on a 2.4 per cent advance followed by even stronger momentum, to make good his prediction that the government will balance its books four years from now.

The IMF is also more pessimistic about the global and U.S. economies, which are critical to Canadian commodity exports and prices, than Ottawa is.

While many economists have given Flaherty a qualified thumbs up for outlining plans to spend $40 billion to stimulate a dormant economy, few if any are buying the government's plan to balance the books in 2013-14 after spilling $85 billion in red ink.

"The aftermath of past recessions . . . saw government deficits two to four times as large in relation to the size of the economy. I believe we will ultimately move to those numbers," says Jeff Rubin, chief economist with CIBC World Markets.

"Right now the electorate wanted modest stimulus and a modest deficit. Twelve months from now, the electorate will want much more stimulus and will not be too concerned about the consequences of much larger deficits."

Flaherty's fourth federal budget has, however, at least won enough support from the Liberal party to assure the opposition parties won't be able to defeat the minority Conservative government, at least not for now.

Liberal Leader Michael Ignatieff said yesterday the Liberals are prepared to defeat the government later should any of the progress reports show that the Tories had failed to implement some budget measures or that the budget wasn't working.

Even before the new and gloomier IMF projects, budget analysts cast a skeptical eye on Flaherty's sunny assumptions.

In his defence, Flaherty noted that his projection this year is slightly darker than the consensus of economists -- although not of the most recent forecasts.

But he gave no reasons why he is assuming a stronger rebound for 2010 and the next four years in nominal GDP, the value of what Canada produces in non-inflation adjusted dollars and the key factor in government revenues.

As well, Flaherty has pencilled in a rebound for commodity prices, particularly oil to US$64 a barrel -- $22 more than current levels -- that allows him to account for a 4.3 per cent bounce-back gross domestic product (without adjusting for inflation) from a 2.7 per cent contraction this year.

"Finance is going with a stronger GDP lift and a stronger terms of trade lift on higher commodity prices than seems to flow out of the IMF report, and stronger than what we would forecast too on both components," said Scotia Capital economist Derek Holt.

If anything, the IMF says, even its dire predictions could underestimate the economic wreckage taking place around the world as global money markets seize up in fear that no borrower, or business, is a safe bet.

And that's only one side of the equation needed to get to balance.

Canadian Taxpayers Federation spokesman Kevin Guadet notes that Ottawa is counting on limiting program spending increases to 2.5 per cent annually in the last three years of its projection, a measure of self-discipline no government has shown since Paul Martin's deficit-busting budgets of the mid-1990s.

Some of the stimulus measures announced Tuesday were temporary in nature, but many were permanent and others will be difficult to wind down.

For instance, the government is extending employment insurance benefits and would take a political hit if it sought to claw back the measure within a few years.

But the most difficult obstacle facing a future finance minister is that having confronted the deficit bogeyman and survived, deficits won't seem so scary anymore.

"Finance ministers for the last decade have been able to go to their colleagues and say, 'Great (spending) idea, I'd like to be able to help you but I would go into deficit,' " explained Dale Orr of IHS-Global Insight. "Now he's crossed the line in the sand and so many people will say, 'We've had deficits and we've lived through it, so why should we balance the budget, give me my money.' "

One ace in the hole for Flaherty is that in the near-term, the deficit may not be as large as he projects simply because Canadians can't afford to accept his generosity.

Already some municipalities have complained they don't have the money to pay their share of municipal infrastructure spending, so part of the $4-billion infrastructure fund may go unspent.

And Orr doubts that Canadians concerned about losing their jobs will be lining up to spend upwards of $10,000 for home renovations to realize a $1,350 return, thereby limiting the cost to Ottawa of the $3-billion program.