19 January 2009

Despite warnings, PM touts fixes for short term

The following article is excerpted from the 16 January 2009 edition of “globeandmail.com”.

Prime Minister Stephen Harper has warned that Ottawa will be forced to run "very significant deficits" in the next few years to pull Canada out of a severe downturn — but a group of leading economists is warning him against wasting borrowed money on short-term measures to spur consumer spending or prop up struggling industries….

Mr. Harper vowed that the hefty spending, which will include tax cuts and relief for the middle class, will be temporary so as not to mire Canada permanently in deficit.

But some economic tools under consideration — including temporary tax cuts and other incentives to spend — could backfire, say a group of six high-profile economists. Such measures often don't result in extra spending by tight-fisted consumers during tough times. The budget should instead aim to fix employment insurance and other programs that protect the most vulnerable in a recession, they said.

Prime Minister Stephen Harper and premiers agreed Friday to an action plan aimed at jumpstarting Canada's flagging economy, including enriched Employment Insurance and massive new investments in infrastructure and job training.

"I'm dead against a temporary GST cut," said Warren Jestin, chief economist at Bank of Nova Scotia, one of the members of the economists' group, which met with The Globe and Mail's editorial board Friday before Mr. Harper emerged from the premiers meeting….

"My yardstick for the budget will be, 'did we put something durable in place that will benefit the Canadian economy?'"

Mr. Harper did not divulge how big a deficit Ottawa will run this year, but he has previously suggested the shortfall could be in the $30-billion to $40-billion range for 2009-2010.

He also wasn't clear on whether tax cuts would be permanent or temporary. "We do not want to go into a long-term or permanent deficit in this country so those [stimulus] measures — or spending measures in particular — will have to be time limited."

The Prime Minister said he's looking at tax cuts that would benefit middle-class Canadians because they "form the foundation" of the economy….

On other issues, the group of economists said:

· Ottawa should take steps to level the playing field across Canada when it comes to eligibility for employment insurance….

· The budget should avoid large-scale, industry-specific bailouts, including proposals to support the ailing auto and forestry sectors. "Don't try to pick winners and losers across industries, provinces, individuals," said Royal Bank of Canada chief economist Craig Wright….

· Infrastructure support should be handled cautiously. Mr. Drummond warned that some of the infrastructure spending the government is expected to include in the budget as a way to stimulate the economy is bound to be "really stupid" because the competition for funding will be determined by how fast a project can be launched….

· Support for low-income Canadians may have a greater economic impact than measures for the whole population, because poor people spend more of their income.