Use surplus to ease slowdown and rebuild public services

Economy report
May 17, 2001

OTTAWA--The government should draw upon the fiscal dividend to ease the impact of the current economic slowdown and to reinvest in programs that bore the brunt of spending cuts in the 1990s, concludes the latest update on the State of the Economy by the Canadian Centre for Policy Alternatives.

The report, by David Robinson, CCPA research associate and economist with the Canadian Association of University Teachers, forecasts program spending, as a share of GDP, will drop from 11.7% in fiscal 1999 to just 11% in fiscal 2003, its lowest point since 1948.

"The dramatic decline in program spending clearly points to an urgent need for public reinvestment in our social infrastructure," says Robinson. "If the current US economic slowdown becomes more pronounced and continues to spill over the border, then the federal government should be prepared to use the fiscal leverage it has to help stimulate the domestic economic and to repair the damage caused by fiscal retrenchment in the 1990s."

Robinson says that, despite the economic slowdown, Ottawa still has ample fiscal room to provide additional spending. He notes that the surplus for fiscal 2000 was $15 billion, well above the $11.3 billion forecast in the October mini-budget. For fiscal 2001, the impact of tax cuts and slower economic growth will reduce projected revenues, but this loss will be partially offset by the impact of lower debt charges as a result of falling interest rates. The surplus will be $7.3 billion--or $1 billion lower than anticipated--in 2001, but will rise to about $10 billion in fiscal 2002 and 2003.

"Ottawa has much more fiscal manoeuvring room than is commonly assumed," states Robinson. "In fact, program spending could rise by an additional $5 billion in 2002 and 2003 while still leaving aside $5 billion for reserves."

Because any unused budgetary surplus at the end of a fiscal year must be applied to the debt, Robinson projects that, in the absence of any new spending or tax measures, Ottawa will reduce the debt by $42 billion over the next four years. As a result, the debt-to-GDP ratio will fall from 52.9% to 43.4%.

In addition to providing fiscal stimulus, Robinson also urges the Bank of Canada to further ease interest rates in order to reduce unemployment.

"The US experience over the past few years has shown that unemployment rates can fall further than many central bankers had anticipated," Robinson explains. "The US Federal Reserve has been far more tolerant of inflation and more willing to push the envelope on employment growth than the Bank of Canada. There is an important lesson here for the Bank. The Bank should seriously consider raising its inflation target so that we can bring the Canadian unemployment rate down below 6%."

Attached Documents: