On May 26, Finance Minister Jim Flaherty announced that the federal deficit for the 2009-2010 fiscal year will be $50 billion, up $16 billion from the original forecast presented in January of this year.
The discrepancy between the forecasted and actual deficit has raised some alarm for Canada’s long-term economic outlook. The cause for concern, according to David Johnson, a professor of economics at Wilfrid Laurier University, is rooted in the source of the recession.
“Most recessions in the past 30 years have had really clear causes. They have been caused by short term tightening by monetary policy… because it was perceived that inflation was a problem,” explained Johnson.
Policy and inflation are not, however, the cause of the current recession that mimics the Japanese recession of the 1990s, in which there was a large price fall in real estate and stocks.
“We don’t have very many periods [in Western countries] in which asset prices have experienced the kinds of declines that they have,” said Johnson.
Thus, the fear becomes a similar experience to Japan’s “lost decade” where recovery was a long and slow process.
Despite these concerns, Canada’s situation isv not dire because of the economic stability the country had entering the recession.
“When the recession started, the budget was approximately balanced,” said Johnson. “It’s actually the Americans that have a big fiscal problem; we have a relatively minor one.”
With Canada’s deficit only reflecting about three per cent of the GDP, in comparison to the United States’ deficit estimated to be between nine and 12 per cent, Johnson says that the recovery will be manageable.
Nevertheless, Canadians will eventually have to pay off the accumulated debt.
“In order to return to budget balance… you have to raise taxes slightly,” said Johnson.
Regarding the discrepancy between the forecast and actual deficit, Johnson again explained it in relation to Canada’s GDP. “When you’re forecasting a really big number, being off by say $5 billion it’s just not that big a deal because it’s simply a percentage of GDP,” he said.
