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Cost of bailout sheds light on deficit Add to ...

The Harper government found itself in a Catch-22 as it drafted the January budget during an unprecedented economic tsunami: how much should it divulge about the rising price tag for bailing out auto makers?

Four months later, the public tab for helping the auto sector has emerged as the single-biggest factor behind a surprise jump in Ottawa's budget deficit this year - which Finance Minister Jim Flaherty divulged Tuesday has ballooned by 50 per cent to $50-billion.

Federal officials said yesterday that Ottawa's auto aid bill could top $10-billion - roughly $7-billion of which Mr. Flaherty is now booking as part of the ballooning deficit because of the serious risk this money may never be repaid.

Back in January, the Conservatives were aware that the federal government's bill for helping the Canadian units of Detroit auto makers could exceed the $2.6-billion Ottawa had committed to date. U.S. private-sector estimates had already suggested the final tab for Ottawa and the Ontario government together could hit $15-billion (U.S.).

The Tories were under pressure to be as transparent as possible when they released the January 27 economic plan, one that pushed Canada into deficit for the first time in more than a decade.

But they also didn't want to tip their hand on how much support they were willing to extend to auto makers. This money would be high-risk loans that required a charge on the books to reflect the serious likelihood taxpayers might never see it again.

"You're not really helping your negotiating position if you project in a budget document an amount of money prior to actually entering into negotiation," a senior federal official said.

Negotiations were still in early stages and Ottawa wasn't about to undermine its ultimatum to auto makers and unions that they had to produce realistic survival plans before their companies received more assistance.

"When you say that we will not provide support unless you restructure properly, you better be willing to live with that and if you roll out an announcement of funding before, prior to negotiations, you're sending the exact opposite message," the official said.

"You're sending a signal to the company and the union that you're going to give them money no matter what."

So instead of setting aside a full-fledged commitment of $10-billion in the January budget, Ottawa only took a provision for a portion of the roughly $2.6-billion it had committed in December.

In the past few weeks, as the full extent of Ottawa's commitment to General Motors and Chrysler took shape, federal officials had a better sense of their aid obligation. And that's why Mr. Flaherty is now taking a charge against the books of roughly $7-billion more.

A source said this is the "biggest line item" in the swelling deficit announced this week, which climbed $16.3-billion above January projections.

Sources say the other half of the deficit's climb - approximately $8-billion - reflects Canada's continuing economic decline. That includes rising Employment Insurance claims and falling tax revenue.

Should Ottawa have been able to foresee the worsening economy when it tabled the budget January 27?

Outside economists certainly didn't, for the most part. The budget reflected the average of private-sector forecasts when it projected a modest decline in economic growth.

"They didn't get great advice from most of the private-sector forecasters who were even more optimistic than Finance," Toronto Dominion Bank chief economist Don Drummond said.

In one respect, the budget forecast was in fact more bearish than the average outlook of bank economists and other outside forecasters. Ottawa cut its forecasts for how much its tax revenue base would contract even beyond that private forecasts suggested.

But within a matter of a month to six weeks after the budget's tabling, Ottawa's forecasts were obsolete. Amid mounting pessimism that the downturn would be worse than expected, private-sector economists hop-scotched past Ottawa in terms of bearish projections, slashing forecasts across the board.

By mid-March, economists projected the deficit could hit about $40-billion.

Few economists would have been shocked then, had Mr. Flaherty announced this week that the deficit had risen to the $40-billion range instead of $50-billion. What took many by surprise was the larger-than-expected outlay for the auto sector - a figure that Ottawa had kept out of public sight.

Follow on Twitter: @stevenchase

 

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