14 January 2009

Deficit will linger for half decade, watchdog warns

This article is extracted from the 14 January 2009 edition of “globeandmail.com”.

Canadians should expect at least half a decade of federal government deficits, the country's parliamentary budget watchdog says, as Ottawa readies a massive stimulus package to tackle the economic downturn.

The Harper Conservatives, who promised during the 2008 election campaign never to run a deficit, are now saying they will run temporary deficits to bail out the economy. They pledge to plot a course for returning to balanced budgets.

Parliamentary budget officer Kevin Page says that an early return to black ink appears difficult….

He is paying close attention to forecasts of what economists call the output gap: the shortfall between what Canada could produce using all resources and what it's actually producing. This gap, measured as a percentage of economic output, emerged in 2008.

The sharp downturn - and the likelihood the economy won't rebound quickly - means this gap is expected to be sizable over the next few years, perhaps 4 per cent or higher at times.

The problem for Ottawa is this idled production puts downward pressure on the amount of tax revenue the federal government collects.

Mr. Page says projections still show a "pretty sizable output gap even five years out."

It will be difficult for Ottawa to easily cut spending to balance the books - effectively withdrawing stimulus from the economy - while the gap is still significant….

One of his staff suggested it might even take Ottawa seven to 10 years to return to balanced budgets under some scenarios, but cautioned there are too many factors at play to forecast with precision….

Parliamentary Budget Office staff say Canada's comeback will depend greatly on how quickly the U.S. economy recovers, given Americans buy 80 per of this country's exports….

The U.S. government is forecast to run a $1.2-trillion deficit in the 2009 fiscal year, he notes, which would exceed 8 per cent of that country's annual economic output….