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Tuesday, October 14, 2008

CANADIAN ELECTION RESULTS - Minority Government in a Broken Economy

Prime Minister Stephen Harper stood out during the election campaign for the relative paucity of his spending promises, but even those may not see the light of day under the current economic turbulence, say economists. Don't be fooled by the stock market rebound, they caution, the malaise is not over. "We've got a recession (ahead) in our numbers for both Canada and the U.S.," said Derek Holt of Scotia Capital.

Global Insight's Dale Orr has Canada just skirting a recession, but the slump will be severe enough as to make it virtually impossible for Harper to carry forward with enacting the about $8 billion in spending commitments of his platform as if nothing has changed. Part of the problem, say the analysts, is that no one knows with any degree of accuracy where the bottom is, or how long we'll be there.

The economists say the new government will need to ensure that Canada's money markets function and banks have sufficient cash on hand to keep giving households and businesses loans. Finance Minister Jim Flaherty has vowed to do whatever it takes to keep Canada's financial system liquid, already moving to take $25 billion in mortgage assets off the banks' books.

Both Holt and Orr say that was a good start, but may not be enough. At the end of the day, Ottawa may have to emulate the U.S. and European governments in guaranteeing inter-banking loans, and/or the insurance on bank deposits from the current $100,000 to $200,000 or $250,000. The next course of action, adds Orr, is for the new government to quickly issue a revised economic update taking stock of the new reality.

The government won't have a deficit problem this year given its healthy revenue take from the commodities boom in the first half of the year, but 2009 will be a different matter, Orr says. "They are going to find (next year) that their revenues are sufficiently short that they can't fit in all the spending," he said. "So they have a dilemma - do they announce postponements in spending or do they present a budget that shows a deficit and ... Harper was so clear that he wouldn't present a deficit budget."

Jayson Myers of the Canadian Manufacturers and Exporters said the current crisis shows that if Canada allows its producing industries to melt away, it will have nothing to fall back on once the commodities boom ends. "Over the last four years the economy has been doing well thanks to a commodity and resource boom that has now come to an end, so we've got to go back to figuring out what creates real value in an economy," he said, referring to "producing industries" like manufacturing.

Forest Products Association president Avrim Lazar agreed, saying Ottawa has to become "an agent of constructive economic change." The two industry advocates have specific recommendations, but the thrust of their recommendations is for governments to invest in innovation, help industry modernize and use the tax system to provide incentives for development of green technologies. "In the past, government has looked at minimizing the economic impact of environmental measures," Lazar explained. "Now they have to look at maximizing positive economic impact from environmental measures."

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