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Finance Minister Jim Flaherty looks set to deliver an austerity budget this Thursday as he sticks to an unwavering goal of eliminating the deficit by 2015. The Harper government seems intent campaigning during the next election – expected that year – on a legacy of steady fiscal management since the credit crisis. But an overcommitment to austerity may come back to haunt to Tories in two years.
In the sclerotic global recovery since the Great Recession, austerity has done more to harm than help weakened economies. The issue has sharply divided Europe, and even its two staunchest proponents – the governments of Germany and the U.K. – are feeling the consequences in their own economies as they preach the benefits to countries such as Spain and Greece with far greater challenges. Germany saw its gross domestic product decline in the fourth quarter, while its industrial output fell along with that of all other EU countries in January. Flat to negative growth for Germany seems likely in 2013. Still, it will not budge from its austerity uber alles stance. Meanwhile, the British government of David Cameron is set to pursue its austerity program with its budget this week, threatening to again plunge the country's already teetering economy back into recession.
Anti-austerity political forces across Europe continue to gain support, while even the previously pro-austerity International Monetary Fund has backed off its support of fiscal belt-tightening, as its economists recently argued looser spending might just be what the suffering EU economies need the most right now.
Mr. Flaherty should pay heed. Canada's economy is no longer the apparently robust poster-child it was coming out of the 2008-09 recession. Its economic growth prospects are retreating, concerns about debt levels and housing prices have come to the forefront, and weak commodity prices are weighing on the prospects of the Western provinces. Consumer sentiment and business confidence remain cautious.
"It is hard to believe that sending out a message that governments need to cut spending in the face of an economy that is growing more slowly than expected, but that [consumers and business should increase spending] will instil confidence," the Policy and Economic Analysis Program of the Rotman School of Management said in a memo last week . "It did not in 2008 and it will not now."
Instead, the paper argues governments should ease up on the deficit cutting in the short term and instead give the Canadian economy a boost of confidence with a more medium-term deficit elimination plan.
Until now, the Conservatives have owned the podium on the economy, as the party with the most credibility on matters economic. But look ahead two years: could the Conservatives find their defence of a zero-deficit strategy to an artificial, politically minded deadline drowned out by criticisms that they blew it by letting Canada fall into a worse recession than necessary? The next election is already shaping up as the Tories' to lose. They should be mindful not to shoot on their own net.
Sean Silcoff is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow Sean on Twitter at @seansilcoff .