Canada's Housing Bubble

Dec 21, 2009 Campbell Clark theglobeandmail.com

Stephen Harper is preparing Canadians for a prolonged clampdown on government spending, but he's insisting that he will dig the country out of deficit without raising taxes.

In a year-end interview Monday, the Prime Minister warned that when Ottawa ends its recovery spending in 2011, Canadians can expect five years of belt-tightening as his government tries to tame public finances.

Mr. Harper says his government will go ahead with a planned second year of pouring stimulus money into the economy in a budget to be delivered in March. But as public concern mounts over ballooning deficits, Mr. Harper is acknowledging the recession's grim hangover and setting up a political choice between his Conservatives and the Opposition: He says the deficit can be wiped out with restraint in Ottawa, and without tax increases.

“The government's approach will be clear. We won't be raising taxes, but we will be constraining growth, making sure that growth is very much contained in the future, and that the tax base of the country can gradually recover,” Mr. Harper said in a year-end interview for CTV's A Conversation with the Prime Minister , taped for a Boxing Day broadcast.

“And within four to five years, if we follow that path, we should be back to a balanced budget.”

Mr. Harper's view that his government will be able to chip away at deficits by squeezing the growth of public spending has been questioned by economists and by former officials with the Finance Department.

Former deputy ministers Scott Clark and David Dodge have already stepped forward to challenge the government's plans for eliminating the deficit, which is projected to reach $56-billion this fiscal year. Mr. Clark has said that Ottawa will have to raise the GST, which Mr. Harper cut in 2006.

“I don't think it's very likely that they can balance the budget without some very severe spending restraint,” said Bank of Montreal deputy chief economist Douglas Porter.

But Mr. Harper argued that Canada's $56-billion deficit is not the debilitating problem that deficits were in the 1980s and 1990s. That is because the country's overall debt is relatively low, so there's no immediate concern that rising interest payments will start to crimp public spending and send deficits even higher.

“It sounds large, but compared to almost every other Western country, our deficit is one of the smallest in the world. And we have very low debt levels, so we have no risk at the present time of any kind of debt-interest payment spiral that we saw in the eighties and nineties,” he said.

Canada's fiscal health may be one reason that Mr. Harper is content to rely on a long-term path out of deficit that many economists reject – capping the growth in government spending and letting the growth of the economy do the rest.

Finance Minister Jim Flaherty has promised he will not squeeze big chunks that make up more than half of government spending – transfers to provinces and transfers to individuals for things such as pensions – which will grow much faster than inflation. The reason is demographics: An aging population will require more health care and pension spending.

Mr. Harper insisted yesterday that his measured approach is the best course: “The way to do it is to exercise sustained discipline, not engage in radical approaches of program cuts or tax increases, but simply to try and do it within a disciplined, constrained spending growth pattern.”

Governments have cut spending before, in the 1995 budget that finance minister Paul Martin delivered under prime minister Jean Chrétien, but most are reluctant to take on the political opposition it can engender.

Mr. Harper's minority government might view that as a risk, unless he wins a majority before those choices have to be put into a 2011 budget.

As 2009 closes, the Prime Minister insisted that even though the private-sector is not yet leading the recovery there are positive signs, including a stabilizing job market and efforts to diversify export markets. “There's no reason Canada can't grow somewhat faster than some of the other developed western economies,” he said.

While he expressed some concern that individual Canadians are carrying high debt-loads and could be vulnerable to higher interest rates, he insisted the government will change mortgage rules – presumably to increase required down-payments and shorten mortgage terms – “if necessary.”

Mr. Harper insisted he is not thinking about an election now, but riding high in the polls his advisers may begin to press him to trigger one in the spring.

There had been speculation that Mr. Harper would prorogue Parliament over the Christmas break, and return in early February with a Throne Speech and budget that lay out his government's plans – which would dare the opposition to force an election campaign during the feel-good weeks of the Vancouver Olympics.

Mr. Harper insisted that he has not decided whether to prorogue Parliament and present a Throne Speech, and he repeated several times that the next federal budget will not come until March.