As Canada's economy struggles to gain momentum, Jim Flaherty faces a delicate balancing act.
On one side, he says the economy is stable enough that no new stimulus measures are required. On the other, it's not strong enough to allow the government to tackle its massive deficits.
Canada will not start paring back its program spending until the economy is firmly on track, the Finance Minister says. But he acknowledges that moment remains stubbornly elusive. "Today there are some tentative indications of recovery," Mr. Flaherty told a Toronto business audience yesterday. "But even with these early positive signs, there's still little evidence of firm, entrenched growth. We have more challenges ahead."
Indeed, recent readings on Canada's economy show growth at a virtual standstill, while new jobs are scarce and consumers remain under pressure. Bankruptcy statistics released yesterday showed personal insolvencies jumped 45.5 per cent to 15,465 in September from a year earlier. Business failures numbered 487 in September, up slightly over a year earlier, but a jump of about 32 per cent from August.
Ottawa is less than one year into its two-year plan to stimulate the economy.
The plan carries a price tag of about $46-billion. The spending is necessary to ensure the country doesn't slip back into recession, Mr. Flaherty said.
As Mr. Flaherty keeps a lid on further stimulus spending, world leaders are also crafting plans to end their extraordinary spending measures and restore their budgets. They are weighing the damage that mounting deficits might inflict against the risk that, by curtailing stimulus, the economy flounders once again.
The European Central Bank plans to begin withdrawing measures providing liquidity in financial markets, ECB President Jean-Claude Trichet said yesterday. Though it's too soon to declare the financial crisis over, it's time to pull back the government's medicine "if the patient is to get back on its own feet."
By propping up their economies with a flood of spending, governments helped to prevent a "catastrophe," and Canada's stimulus package is vital to its neighbours in the G20, Mr. Flaherty said.
He recalled the chaos of Friday, Oct. 10, 2008. On that morning, in the midst of a federal election campaign, he unveiled an emergency program designed to stimulate the housing market by buying mortgages from the banks. That afternoon, Mr. Flaherty found himself in the cash room of the U.S. Treasury with Hank Paulson, the secretary of the treasury at the time, and the other G7 finance ministers.
"The meeting began, I can tell you, with a declaration that we were all in deep trouble and that we needed to speak frankly to each other," Mr. Flaherty said. "We all agreed that we had to act. There was concern that the market would not open on Monday, there was concern that - particularly in the UK - some banks would not open, there would be a run on British banks."
Early the next morning the group was meeting with then President George W. Bush in the Rose Garden, presenting a plan, Mr. Flaherty said. By Saturday night, all of the world's major economies had agreed to the plan, which included vows to not let systemically important financial institutions to fail, and moves to unfreeze credit and money markets.
"We did realize full well the potential consequences of these open-ended commitments. We chose to act the way we did," Mr. Flaherty said.
"The cost of not acting would have been disastrous."
Today, the global economy is still fragile but the downturn has stabilized and in Canada, the housing market is growing, auto sales are increasing and employment, "while still far too low," appears to be stabilizing also, he said.
"We don't want to switch gears now."
That being said, Mr. Flaherty said the government will not undertake any major new spending initiatives in its 2010 budget. And Ottawa will resist pressure to make any of its emergency measures indefinite or permanent obligations, he said.
The temporary stimulus measures will end by the end of the fiscal year 2010-11, he said. Budgeting beyond that is difficult, however, because the global economic outlook is still uncertain.
Once the government's certain that recovery has fully taken hold, if necessary, it will curtail spending to balance the budget, he said. Rather than tax increases or cuts in transfers to the provinces, the money will come from the $100-billion in federal program spending that is currently expected to grow 3.3 per cent per year.
Waiting too long to make such a move could risk chronic deficits. But acting too quickly could bring on another economic slowdown, Mr. Flaherty said.