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Finance Minister Jim Flaherty presents an update on the government’s Action Plan at the University of Winnipeg. (John Woods)
Finance Minister Jim Flaherty presents an update on the government’s Action Plan at the University of Winnipeg. (John Woods)

Stimulus gamble: How Ottawa saved the economy – and wasted billions Add to ...

The prepared campaign lines were quickly tossed aside by Liberal Leader Stéphane Dion and NDP Leader Jack Layton as they jumped on the headlines, demanding a government response to the crisis. But they insisted – as did the Conservatives – that deficit spending was not required. Mr. Harper accused the other parties of being overly pessimistic about the state of the economy.

“What the opposition is demanding I do – raise taxes, increase spending, do a lot of direct intervention and bailouts – these things would demonstrably ruin our fiscal credentials and undermine the strengths that we do have in our economy,” he told the CBC on Oct. 7, one week before election day.

Conservative sources say it was clear the economy was worsening but the party did not want to change its message in the middle of an election.

Days after the election in which the Tories won 143 seats, the message changed. Mr. Harper was no longer ruling out the possibility of a deficit. A key development took place in Washington on Nov. 14 and 15, when Mr. Harper met with world leaders of the G20.

The group emerged with a call for fiscal stimulus measures. Dominique Strauss-Kahn, managing director of the International Monetary Fund, suggested that countries should approve new spending worth 2 per cent of gross domestic product. Conservatives believed the international consensus gave the Prime Minister and his party political cover to shelve the no-deficit promise.

The following week, Mr. Harper said he was considering “unprecedented” stimulus and described the economic situation as potentially as dangerous “as anything we have seen since 1929.”

In light of that talk, there was a clear disconnect with Mr. Flaherty’s ensuing fiscal update, released on Nov. 27, 2008. The document contained no stimulus plans, and argued that Ottawa had already given the economy a boost by cutting the goods and services tax to 5 per cent that year. It hinted of more spending in the 2009 budget, but presented a long-term forecast that showed no deficit. On top of that, the update contained a major surprise: The Conservatives would be eliminating the $28-million subsidy to political parties.

The Conservatives backtracked two days later, but it was too late. The Liberals, NDP and Bloc Québécois were deep into negotiations over how to defeat the government.

In retrospect, many economists say the November update would have been a better time to launch a stimulus package. But at the time, those on whom Mr. Flaherty relied on for advice say the data were not clear enough to make strong recommendations.

Bank of Nova Scotia’s chief economist Warren Jestin, who provided data and advice to Mr. Flaherty in the fall of 2008, said his “intuition” at the time was that things were getting much worse, but the economic numbers still weren’t that bad.

“The sad thing about being an economist is you’re dealing with lag data,” he said.

Mr. Flaherty had the same sense of unease. “None of the economists in the private sector gave us advice that we’re into a recession,” Mr. Flaherty said. Inside the government, the thinking was that some modest stimulus spending in the 2009 budget would be enough.

“I can look back now and say we were in recession the last quarter of 2008,” Mr, Flaherty said. “So it was a bit awkward to present what I presented and then to realize that things were getting increasingly worse.”

Jean Charest, Quebec’s premier from 2003 to 2012, said the Harper government did not want to believe that Canada was being dragged into the global financial crisis and recession.

“The speed at which they turned 180 degrees was spectacular,” Mr. Charest said. “I don’t think anyone held it against them because we had just seen the world unravelling in front of us. There weren’t many options. They did what they had to do, quite frankly.”

The bailout

On Monday, Nov. 3, 2008, Dwight Duncan, then Ontario’s Finance Minister, was flying back from an emergency meeting with Chrysler Group LLC chief executive officer Robert Nardelli and other top officials in Auburn Hills, Mich.

The ultimatum he had received from the auto maker was blunt and alarming.

Chrysler was out of cash and wouldn’t be able to pay its workers in December. Without help from the U.S. government, the company was dead. Without money from governments in Canada, Chrysler would pull out of the country.

Two vehicle assembly plants in Windsor and Brampton, Ont., along with a powertrain plant, would close or be moved to the United States. Nearly 10,000 factory and head office jobs would be gone.

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