Federal deficits could be much larger than anticipated, says Alternative Federal Budget
OTTAWA — While it is now generally acknowledged that the federal government is headed for deficit in the coming years, a report released today by the Canadian Centre for Policy Alternatives (CCPA) says those deficits could be much larger than are currently anticipated.
The Alternative Federal Budget (AFB) Economic and Fiscal Update re-estimates the federal fiscal picture based on four scenarios of economic downturn, from slowdown to major recession. A mild recession in 2009 would create a very small deficit in 2008/09, followed by deficits of $12.6 billion in 2009/10 and $20.5 billion in 2010/11. A major recession starting in the fourth quarter of 2008 and lasting through 2009 could produce deficits of $1.4 billion in 2008/09, rising to $27.9 billion in 2009/10, and $46.8 billion in 2010/11.
In January 2008 the AFB was among the first to raise the likelihood of fiscal deficits due to the combined effect of Conservative tax cuts and economic slowdown. This report is based on more pessimistic scenarios of a recession than last week’s report by the Parliamentary Budget Officer. It argues that the feds should accommodate deficits produced by the recession and even go further with additional stimulative measures.
“The real underlying question now is not whether the federal government should run a deficit but how large the planning deficit for 2009/10 should be,” says Marc Lee, CCPA Senior Economist. “The federal government has a lead role to play in cushioning the impact of a recession, both through federal programs and in partnership with the provinces.”
To that end, the report outlines a six-point fiscal stimulus package that recommends strengthening the EI program and other income support measures, launching a major federal-provincial green infrastructure program, creating a green manufacturing fund, and preventing home foreclosures.
“Government policy should be to prevent a large increase in unemployment while strengthening EI and other supports to assist families and communities,” says Lee. “A danger is that Canada will be too timid or will revert to less effective measures like tax cuts. Spending and infrastructure investments are better targeted and deliver a stronger fiscal stimulus than would further tax cuts, which are more likely to go to higher-income families who may save rather than spend the proceeds.”
The CCPA argues that Canada needs to do its fair share of a coordinated global effort to fight the coming recession, so it must be bold. It notes that Canada is well-positioned to do so and this also offers an opportunity to retrofit the country’s crumbling infrastructure for a green economy.
Retooling Canadian Fiscal Policy for the Coming Recession: Alternative Federal Budget Economic and Fiscal Update is available on the CCPA website: www.policyalternatives.ca