The federal government should move decisively on a fiscal stimulus package of as much as $16 billion next year to arrest the economy's slide into recession, the Bank of Montreal says.
In a four-page note released late Thursday, deputy chief economist Douglas Porter argues that a $16 billion stimulus in the Jan. 27 federal budget is appropriate. After 12 years of budgetary surpluses, Ottawa can well afford to spend to boost growth and put more money into ordinary Canadians' pockets to help grow demand, spur buying and create jobs.
"After all, the string of budget surpluses in the past decade were the public sector equivalent of saving for a rainy day, and it's starting to pour," said Porter.
Porter says many economists still object to governments going into deficit to stimulate the economy, preferring that central banks carry the load through interest rate cuts to encourage consumers and companies to borrow, spend and invest.
That is a reasonable position under normal circumstances, he says, but adds that the current situation is dire and time is of the essence, noting that monetary stimulus typically takes 12 to 18 months to fully take hold.
As well, the Bank of Canada has already chopped interest rates by three percentage points in the last year - the latest coming in this week's three-quarter point cut - and the short-term trendsetting rate now stands at a 50-year low at 1.5 per cent.
"Monetary policy could use an assist," said Porter, whose bank is one of Canada's big financial institutions, with profits of nearly $2 billion in fiscal 2008 and 36,000 employees in Canada and the United States.
Prime Minister Stephen Harper said this week the Jan. 27 budget would contain "significant" stimulus, but did not give number.
However, leaders of the G20 suggested last month that stimulus should be around two per cent of the size of the economy - which would amount to $32 billion for Canada - although it was unclear whether that would be over one year or several.
Porter argues the economy badly needs a stimulus, citing November's 70,600 job losses and recent sharp declines in home sales, housing starts and auto sales.
Earlier Thursday, the Bank of Canada also warned of a "significant risk" of a deeper recession than previously anticipated, after officially declaring the country in recession earlier in the week.
The central bank said that if the economy worsen, many more Canadians could face defaulting on mortgages and other consumer loans.
"A stimulus package of ($16 billion) would be both substantial but also affordable ... it would be unwound without significantly slamming growth in the ensuing years," Porter writes.
And he offers a number of suggestions on how Ottawa can spend the money effectively beyond the already expected construction projects on roads, bridges and sewer works to improve the country's infrastructure.
These include a one-time bonus for seniors on public pensions, temporary cuts to payroll taxes and the GST, and spending vouchers that would give Canadians government cheques on the condition they spend rather than save.
As well, Porter says Ottawa should consider a one-time financial transfer to the provinces, which could put the money more directly to use.
Porter's recommendations partly coincide with a ranking of options open to Finance Minister Jim Flaherty for his upcoming budget issued by IHS Global Insight economist Dale Orr.
Orr and Porter agree that the key criteria for choosing the best form of fiscal stimulus is that measures should be tailored to impact the economy as quickly as possible, be targeted and be temporary so they can be withdrawn once the economy recovers.
Orr places small infrastructure projects at the top of the list, followed by a temporary cut to the GST, followed by cuts to personal income taxes.
He does not say how big the stimulus should be, but says with the opposition parties threatening to topple the government over perceived inaction on the economy, "They must design a fiscal stimulus package acceptable or they will be defeated."
The recommendations from the economists come as the Finance Department opened public consultations on the Jan. 27 budget beginning Friday in Saint John, N.B., where Flaherty is scheduled to speak.
"The government is open to innovative new ideas that would help shape the plan for economic recovery in the 2009 budget," the finance minister said in a release late Thursday.
The department said ideas for stimulus already proposed include investing in housing, expediting infrastructure spending and incentives for worker training.
what do you think?
Adam Affleck
Charlottetown Remax Realty
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