Friday, October 17, 2008

Election aftermath: perhaps a $10 billion shortfall.

This is from the Globe and Mail. No doubt Harper will see this as a golden opportunity to cut social programs. Of course tax cuts for corporations are not social programs so they will stay as will military expenditures. Harper is fortunate these predictions did not come out before the election when he was busy dismissing the idea of deficits.

Change course or run deficits, top economist warns Ottawa
Grim forecast and fresh recession prediction pose a challenge to Harper and his cabinet
With reports from Brian Laghi and Heather Scoffield
October 17, 2008
OTTAWA -- The federal government is on track to run budget deficits in each of the next four years - as deep as $10-billion in two of them - unless the re-elected Harper Conservatives move to avert the red ink, a senior Canadian economist projects.
The forecast, which came as a second big bank predicted an imminent recession, suggests a big challenge ahead for Jim Flaherty, whom sources say will remain as federal finance minister when Prime Minister Stephen Harper assembles his post-election cabinet.
Keeping Mr. Flaherty in his post is aimed at avoiding an unsettling change of economic leadership as Canada grapples with spillover from global financial turmoil. Yesterday, the Bank of Montreal followed the Bank of Nova Scotia in predicting a recession, saying the economy will start contracting in the fourth quarter of 2008.
Toronto Dominion Bank chief economist Don Drummond forecasts a balanced budget for the current fiscal year ending March 31, 2009. But he projects a deficit of $10.4-billion in the next fiscal year, 2009-10, as well as a $9.9-billion deficit in 2010-11. He also forecasts deficits of $5.5-billion and $2.4-billion respectively in the two subsequent years.

His estimates are based on spending and tax plans as set out in the 2008 budget and assumes that revenue collected by the government will "soon begin to deteriorate" as the worsening U.S. economy drags down Canada.
"I really couldn't see a credible scenario in which they [deficits] didn't last for a long time," Mr. Drummond said.
The economist said his deficit projections show the Tories will be under pressure to trim spending.
"Many economists have said it's acceptable to run a modest deficit for a short period of time, but there's virtually nobody on record as saying it's acceptable to run deficits for many years in a row."
"I don't think you can tolerate a deficit of that magnitude going on for four years," he said of his projections.
The TD forecast does not predict a recession, but does say there will be a dramatic slowdown.
During the election campaign, Mr. Harper vowed to keep budgets balanced and not raise taxes, commitments that leave spending cuts as his only option. On the hustings, however, he dismissed questions about where he would reduce spending as "a ridiculous hypothetical scenario."
At the same time, however, Mr. Drummond said he thinks the government will be hard-pressed to balance the budget when facing potential annual deficits of $10-billion. He said it is hard to cut that much spending because many programs are politically risky to touch.
"If you want to get something like $10-billion [in savings], you've got to go and nuke a whole bunch of programs," said Mr. Drummond, a former federal Finance Department official.
"I can't imagine they will trample into things like Old Age Security and the major transfers to the provinces, and probably not defence while [the mission in] Afghanistan is still going on."
Mr. Drummond suggested the government may have to focus on later years for cuts. "I think they will have to cut [spending], but not necessarily in 2008 or 2009, when the economy will be at its weakest."
In its 2008 budget, the government forecast a surplus of $1.3-billion for the next fiscal year and modest surpluses in years after............

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