OVER the last decade in Canada, regardless of the party in power, the idea of running a federal budget deficit has been unthinkable. Now, the ruling Conservatives are sending increasingly clear signals that they are ready to break that taboo. And observers say the financial times are so extraordinary that the government may not suffer too much politically. Although many major nations are permanently in the red – most notably the United States – the concept is anathema in Canada, which spent several very painful years eliminating a C$42 billion ($33 billion) budget deficit in 1990s. During the campaign ahead of the Oct. 14 general election election, the Conservatives of Prime Minister Stephen Harper insisted they would not run a budget deficit over the next four years. Now they sound much less certain. Finance Minister Jim Flaherty, who says there will be a modest surplus this fiscal year, ending March 31, refused to speculate on Friday on what might happen the next year, saying it would be irresponsible to do so. Yet in an interesting admission of what might be to come, he told CTV television on Thursday, “we have to stay away from structural deficits” – that is, deficits that persist even when the economy is growing at a reasonable rate. He added: “Government has to be wary of situations where they will have a great difficulty getting in and out of deficit in the medium and long term.” Don Drummond, chief economist at Toronto-Dominion Bank, said on Friday that a deficit was inevitable. He predicts that Ottawa will post a C$10.4 billion deficit next fiscal year and smaller deficits for the three years after that. Even if Ottawa scrapped all its plans for new spending, tax cuts and debt reductions next year, decreasing revenue flows would still mean a deficit. “If the economy does weaken, I don't think there's anything particularly wrong with running a short-term deficit of manageable size but I think the emphasis really has to be short-term,” Drummond told Reuters. “Harper and Flaherty have already opened the door for it ... and I haven't seen anything particularly heavy land on their head,” he said. Unpalatable choices In the first five months of this fiscal year the surplus plummeted to C$1.16 billion from C$6.62 billion last year. For all of the last fiscal year, Ottawa had a surplus of C$9.6 billion. If Drummond's predictions are correct and Ottawa wanted to stay in surplus next year, it would have to cut spending or raise taxes – neither of which is a palatable choice. During the campaign, Harper dismissed a question about where he would have to reduce spending as “a ridiculous hypothetical scenario”. Flaherty said on Thursday that tax cuts introduced this year had stimulated the economy, adding that now was not the time to start removing stimulus. Elvis Picardo, an analyst and strategist at Global Securities in Vancouver, said a deficit was likely. “Conceptually, you may not want to do it. But at the end of the day, to prop up the economy, you may have no choice but to do it,” he told Reuters. The government of Ontario – Canada's most populous province and manufacturing heartland – said on Wednesday it would likely run a budget deficit of C$500 million ($393 million) this fiscal year. The announcement passed with little protest. Stephen Clarkson, a professor of political economy at the University of Toronto, said Harper was unlikely to be damaged if the federal government started to run deficits. “With the global economic crisis providing the perfect excuse, I think that anything can be marketed. Nobody knows what to do.... The changed circumstances mean that deficits can come back into fashion,” he told Reuters. The opposition Liberals, who eliminated the deficit in the 1990s, want Canada to stay in surplus. Former Liberal Finance Minister Ralph Goodale said the government's decision to cut taxes over the last two years had eliminated “all of the shock absorbers” that Ottawa could have used to avoid deficits. “Once you get on that slippery slope it is very hard, as we know from past experience, to turn that trend around. And that's the shame of the predicament that Mr Harper and Mr Flaherty have put Canadians in ... (they) have piddled it all away,” he told CTV television on Friday. TD Bank's Drummond said the anti-deficit mantra had been harmful. “I think it's made for worse policy in both senses – it made people similarly allergic to have surpluses so governments ran really a mindless fiscal policy where whatever revenues come in the front door, they made sure all of it got blown ... out the back door,” he said. – Reuters __
