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The Globe and Mail

Harper prepares Canadians for possibility of another recession

Stephen Harper's warnings that Europe needs to get its house in order, and not look to Canada for help, was mostly intended for folks back home.

The Prime Minister is preparing Canadians for the possibility of another recession, while insisting that it's the Europeans, not his government, who will be to blame.

The blunt truth, however, is that it doesn't matter who is to blame. If recession comes, this time there will be very little that any Canadian politician can do about it.

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"Governments in Canada don't have nearly as much latitude as they did in the last episode to open their taps," says Douglas Porter, deputy chief economist at BMO Financial Markets.

The federal finances are in reasonably good shape. If a European calamity creates a global financial crisis that sends Canada into a recession, Finance Minister Jim Flaherty may choose to push back the date for balancing the books from the current target of 2015.

If he wanted to, Mr. Flaherty could do more, by increasing the deficit and pumping billions into the economy through infrastructure or other stimulus spending.

But neither Mr. Flaherty nor Mr. Harper are fans of big stimulus packages – they had to be pushed into creating the last one by opposition parties that threatened to bring down the government – and the fact remains that a new recession would arrive with Ottawa already running deficits, unlike the last one, which began with the federal books in surplus.

The larger problem is that the biggest provincial governments, which normally would amplify federal stimulus spending by matching it, have hit a fiscal wall of their own. Their combined deficits are now about as large as the federal deficit.

"There's far too much focus on the federal government and not enough on the provinces," Mr. Porter maintains.

The McGuinty government in Ontario is engaged in a grim battle to eliminate a large and chronic deficit. The province's ratio of debt to gross domestic product has reached 40 per cent. There's simply no room in Ontario for a massive new bout of stimulus spending.

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Quebec is in even worse shape. Despite strong measures by the Charest government to eliminate the deficit – which is the real reason that students have taken to the streets – the province is saddled with a debt-to-GDP ratio of 54 per cent. If Ontario is hitting a wall, Quebec is in danger of going off a cliff.

British Columbia, the third biggest provincial economy, is better off, but the Liberal government there hasn't been able to balance its books in recent years, and sending the deficit through the roof to fight a recession could earn the province a call from the credit-rating agencies.

In sum: If a recession does arrive any time in the next few years, the federal government will be less able and willing to fight it with massive spending, and most of the provinces will be hogtied.

"I would not expect anything from a province, that's for sure," predicts Ron Kneebone, a professor of economics at the University of Calgary.

That's just as well, from Prof. Kneebone's perspective. He believes government spending is largely a waste of money during a downturn, which should be fought instead through monetary policy.

But even Conservative politicians, he notes, have a hard time resisting the urge to action in a financial crisis. And NDP Leader Thomas Mulcair will be pushing for the biggest stimulus package possible.

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If a recession arrives, the great fight in Ottawa will be between a Conservative government reluctant to pile on tens of billions of dollars in new debt, and an NDP opposition that demands just that to combat unemployment.

It would be an ugly debate, fought on the backs of suffering workers and stricken businesses. We can only hope the Europeans find a way out of the mess that they're in danger of dragging us all into.

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