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OTTAWA—A decade of federal budget surpluses could come to an end if an economic slowdown materializes in 2008, says a technical paper for the Alternative Federal Budget, published today by the Canadian Centre for Policy Alternatives.
According to the study, the federal government’s Economic and Fiscal Update, which calls for surpluses as far as the eye can see, does not fully consider the very real possibility of an economic downturn. The study stress-tests the government’s numbers and finds it would not take much of a drop in economic growth before the budget returned to deficit.
While the Canadian economy has so far remained resilient to a worsening economy in the U.S., policy makers need to prepare for the potential knock-on effects from the deflation of the housing bubble and the ongoing credit crunch in financial markets—and that means preparing for a deficit if need be, says the study.
“The federal government can and should run a deficit if the economy turns down,” said CCPA Senior Economist Marc Lee, author of the technical paper. “The biggest danger is that the feds will respond by cutting spending in order to maintain the budget balance, a move that would only worsen the downturn.”
The study models four scenarios of economic slowdown and recession, each successively worse than the previous one. In the most pessimistic scenario, the federal deficit will be over $6 billion in 2008/09, rising to almost $13 billion in 2009/10. But even in the least pessimistic scenario, surpluses disappear in 2008/09 and the budget goes into a $2 billion deficit in 2009/10.
“With an election potentially on the horizon, all federal parties should be clear to the public about what their plans would be with regard to taxation, spending and deficits,” said Lee.
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