Flaherty warns of frail economy

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Jane Taber
From Monday's Globe and Mail
Last updated Monday, May. 30, 2011 9:24AM EDT

Finance Minister Jim Flaherty fears the world could be faced with another recession, given the fragility of the global economy and especially the troublesome debt and deficit situation across the border.

“I am quite worried,” Mr. Flaherty told CTV’s Question Period Sunday. “We have lived three-and-a-half years now since the credit crisis started in late August, 2007. We are seeing in Europe, in particular, some very difficult situations.”

The minister outlined this bleak financial scenario as he prepares to introduce his budget – the first budget of the Harper majority government – on June 6. Mr. Flaherty says the budget will be very similar to the one introduced March 22 that died when the government was defeated.

Mr. Flaherty says he will meet with private sector economists in Toronto Tuesday for their forecasts – depending on what they say he may have to tweak his numbers slightly.

“But in my discussions so far I think we’re mainstream, we’re on track. We’ll be okay,” he said. “What we have to watch for and try to avoid in our dealings within the G7, G20 are any sudden shocks to the economies of Europe, any sudden credit shocks.”

Leading Canadian economists suggest Mr. Flaherty’s concerns are not out of line with the global situation.

TD chief economist Craig Alexander, who will be meeting with Mr. Flaherty Tuesday, said the Finance Minister is “right to be worried.”

“Forecasters were generally upbeat a couple of months ago,” he said. “The risk that has escalated is a European debt restructuring.”

BMO’s deputy chief economist Douglas Porter said he believes the minister is “just signalling some increased caution ahead of the budget.”

He noted there has “been some ratcheting up of global risks in recent weeks, including the factors Mr. Flaherty mentioned as well as Japan’s crises and $100 oil. However, it’s not obvious that the risks have increased so materially to warrant ringing the alarm bell.”

TD Bank’s deputy chief economist Derek Burleton was also cautious about Mr. Flaherty’s comments on the global economy, noting that the minister didn’t say “he was losing sleep over it.”

“While the Canadian federal government is clearly better off, the recent financial crisis demonstrated how integrated the global economic financial system is,” Mr. Burleton said.

Referring to the debt and deficit situation in the U.S. as “difficult,” Mr. Flaherty said he recently went to the U.S. to encourage Republican budget leaders to “try to come to some sort of sensible budget resolution with the U.S. administration.”

“It’s important not just for Canada but for the whole world that they have a good plan in place that evokes confidence,” he added.

Mr. Flaherty spoke the same weekend Prime Minister Stephen Harper was in Greece to encourage the Greek government to continue with its austerity program.

Despite the global situation, Mr. Flaherty said he still believes the deficit can be eliminated by 2014. However, he said, it won’t be without difficulty.

Jim Stanford, a Canadian Auto Workers economist, suggested austerity programs can backfire – as can cutting federal spending at this time.

“If there is implications for his budget in what he said, they should be to go very, very carefully on any spending restraint at all. And with Mr. Harper in Greece that is very fitting because the austerity in Greece has been utterly self-defeating.”

Mr. Flaherty also said that the measures in the March budget aimed at appeasing the NDP will remain in the June document – including $400-million to restart a program to make homes more energy efficient and $300-million boost to the Guaranteed Income Supplement.

He is, however, adding a new measure to his June budget – to gradually eliminate the $2-per-vote taxpayer subsidy to political parties.

It’s a controversial move which could deeply damage the Liberal Party, which has been struggling to raise funds since big corporate and union donations were eliminated in 2004.

Mr. Flaherty suggested the individual contribution limit of $1,100 would not be increased as a compromise.

Interim Liberal Leader Bob Rae dismissed the sudden move.

“Don’t know why, in a Parliament that is supposed to be marked by a ‘new spirit,’ Flaherty would be ruling out suggestions and amendments he hasn’t even heard yet,” Mr. Rae said.

“Sounds a lot like the same old ‘my way or the highway’ that has always been such a feature of Conservative behaviour.”