Economy weaker than predicted in last budget, but no second stimulus: Flaherty

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OTTAWA, Ont. - Canada won't get a second round of stimulus spending even though the economy has yet to fully recover, Finance Minister Jim Flaherty said Tuesday.
The finance minister met with 15 economists Tuesday morning and revised the country's projection for growth this year slightly upwards this year and slightly downwards longer term.
But the major difference in the new projections comes in comparing where the economy is today to where the government expected it last January, when it passed a record $46-billion stimulus package.
Ottawa now believes the country's 2010 nominal gross domestic product - the size of the economy - will be $56 billion below the level it expected last January, which directly affects tax revenues.
And the gap expands in outgoing years.
As well, it now expects the unemployment rate to average 8.5 per cent this year - less than the view in September - but a full point higher than the January 2009 budget estimate.
After meeting with the economists Tuesday, the minister said the recovery is still fragile and uncertainty remains. But, he stressed, he won't change his plans to keep the stimulus flowing for one more year and then turn off the tap.
"We don't intend to do more stimulus other than what we committed to," he said.
"This country looks so great, compared to most of the other western industrialized countries. Our debt to GDP ratio is something like 30 per cent, the Americans are approaching 60 per cent."
In a speech later to a meeting of Canadian manufacturers and exporters, Flaherty said the country will "exit the recession in a very competitive position vis-a-vis other countries around the world."
CIBC chief economist Avery Shenfeld backed Flaherty's plan, saying the stimulus was still needed in the short term, given the 8.5 per cent jobless rate and the lack of private sector investment, but next year Ottawa should turn its attention to the deficit.
The new economic consensus is that Canada will grow by 2.6 per cent this year and 3.2 per cent next year, slightly lower than the Bank of Canada's projections of 2.9 per cent and 3.5 per cent respectively.
Flaherty said he intends to unveil government's "path" for getting out of the fiscal hole in the March 4 budget, although he gave no estimate when that might be accomplished.
Industry advocates said despite constraints on government spending going forward, Flaherty can still help the manufacturing and forestry industries through tax incentives to encourage investment in machinery, equipment and green technologies.
"The beauty (of tax credits) on anything to do with investment is that it doesn't cost them a penny unless someone invests in a Canadian business, and that's what we need for the recovery," said Avrim Lazar, president of the Forest Products Association of Canada.
Jayson Myers of the Canadian Manufacturers and Exports, which held the one-day summit on the economy, said Ottawa should also offer a break on employment insurance premiums for firms spending on worker training.
In the government's most recent calculation, the deficit is projected to slide from the current $56 billion to $5 billion in the 2014-15 fiscal year.
However, Parliamentary budget watchdog Kevin Page disputes Ottawa's numbers, predicting the aging population will limit economic expansion and saddle the government with a chronic $20-billion deficit unless it raises taxes or severely chops spending.
Flaherty got some backing from the economists Tuesday, most of whom said it was still possible for the government to return to balance in five to eight years. Several told reporters they believe economic growth and government spending restraint can do the trick.
"I think the combination of a stronger economy and restraint on direct spending growth, and not touching transfers (to provinces), they can actually achieve a balanced budget within five to seven years," said Craig Wright, chief economist at the Royal Bank.
Bank of Montreal economist Douglas Porter was the most pessimistic, but agreed Ottawa could eliminate the deficit given a relatively robust recovery and "some very real spending restraint."
"The question asked is, should that (balanced budget) be the primary focus given the uncertainty we're still facing in the global economy?"
Porter stressed that the government should avoid raising taxes in an effort to eliminate the budget.

Organizations: CIBC, Bank of Canada, Forest Products Association of Canada Canadian Manufacturers Bank of Montreal

Geographic location: OTTAWA, Ont, Canada

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