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

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OTTAWA, Ont. - Canada won't get a second round of financial stimulus even if the economy is weaker and unemployment worse than expected when Ottawa tables its recovery budget, 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 to 2.6 per cent from 2.3 per cent in September.
But since the recession has been much deeper than the January budget had projected, it still leaves the value of Canada's gross domestic product well below, and unemployment much higher, than assumed a year ago.
The government now believes the country's 2010 nominal GDP - the size of the economy - will be $56 billion below the level it expected last January, which directly impacts tax revenues. And the gap expands in outgoing years.
It now expects the unemployment rate to average 8.5 per cent this year, a full point higher than the January 2009 budget's estimate. Flaherty thought the situation so serious last January that he tabled an unprecedented $46 billion in stimulus spending and tax cuts in an effort to resuscitate the economy.
After meeting with the economists Tuesday, the minister said the recovery is still fragile and that 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."
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.
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.
In the government's most recent calculation, the deficit is projected to slide from the current $56 billion to $5 billion in fiscal year 2014-15.
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 with the Royal Bank.
Bank of Montreal economist Douglas Porter was the most pessimistic but agreed the government could eliminate the deficit, although he believes it would require 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 Montreal

Geographic location: OTTAWA, Ont, Canada

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