Canada May Project First Deficit Since 1997 as Growth Stalls

By Alexandre Deslongchamps and Greg Quinn

Nov. 27 (Bloomberg) -- Canadian Finance Minister Jim Flaherty probably will project the government’s first deficit in 13 years today as revenue evaporates, and may confirm the world’s eighth-biggest economy is on the brink of a recession.

Flaherty updates his forecasts at 4 p.m. New York time today, and may announce an end to 12 budget surpluses, the longest streak among Group of Seven nations. The minister has said the update won’t include big spending measures, preferring to wait for his budget early next year. Opposition lawmakers and some economists say he shouldn’t delay.

“Don’t worry about the deficits,” said Mike McCracken, chairman of forecasting company Informetrica Ltd. in Ottawa. A “sizeable” stimulus of about C$30 billion ($24.4 billion) over two years is required “to make an impression on the outlook,” he said.

The economy is sputtering amid slumping shipments of cars and lumber to the U.S., its largest trading partner, and as lower prices for exported commodities such as oil and wheat erode revenue. The economy will shrink 0.5 percent next year as private consumption falls 0.6 percent, the Organization for Economic Cooperation and Development said on Nov. 25.

At a meeting this month of the Group of 20 industrialized and emerging economies in Washington, International Monetary Fund Managing Director Dominique Strauss-Kahn urged nations to inject stimulus worth 2 percent of gross domestic product. For Canada, that would represent about C$30 billion.

‘Leading By Example’

While today’s update won’t include a major stimulus or the sale of government assets, Flaherty may announce “tens of millions” in cuts to government travel and hotel expenses, an aide to Prime Minister Stephen Harper told reporters yesterday at a briefing.

“We just have to be careful in how we spend money,” Immigration Minister Jason Kenney told reporters yesterday in Ottawa. “We have to be conscious of leading by example.”

Ministers from Harper’s Conservative Party government also have said they want to speed up infrastructure projects that have been funded through previous budgets.

“If there are projects that can be moved forward expeditiously that will help create employment,” Transport Minister John Baird said outside Parliament on Nov. 24.

Former Bank of Canada Governor David Dodge said two days ago in London, Ontario, that the government should consider “significant” investment in infrastructure.

Harper himself said the day before that Canada would run a “short-term” deficit to stimulate the economy if necessary, though he would seek to avoid a series of deficits that would outlast a period of sluggish growth.

Global Slump

Updates tend to come about halfway through a fiscal year and often simply revise the initial projections. Last year though, Flaherty, 58, used his update to announce C$60 billion of tax cuts over five years that he and Harper say helped shield Canada from the worst of the global slump.

“Times are uncertain and the economic picture is not getting better,” Flaherty told reporters in Toronto on Nov. 24. While the economy is not in a recession “right now,” it might slip into a “technical” recession -- two consecutive quarters of contraction -- next year, he said, echoing Harper.

The Conservatives, re-elected on Oct. 14, said during the campaign that they would cut a federal diesel tax by C$2.3 billion, boost federal aid to automakers, aerospace and resource businesses to C$1.7 billion and cut taxes for seniors by C$1.1 billion.

Auto Industry

The government must help companies in the auto industry immediately, because “they might run out of money within weeks, and it’s quite possible they’ll be bankrupt if we wait until February,” John McCallum, a Liberal Party legislator and former chief economist with Royal Bank of Canada, said yesterday.

Canada’s parliamentary budget office said Nov. 20 that Canada is on course to post a deficit of C$3.9 billion next fiscal year and a C$1.4 billion deficit in 2010-11. This year there will be a surplus of C$4 billion, the budget office said. The last deficit in Canada was in 1996-97.

“We’re seeing consumers being very careful with their spending -- they’ll fix something when it breaks, but when it can wait, it waits,” said Richard Roy, president of Boucherville, Quebec-based automotive-parts distributor Uni- Select Inc.

“The government can’t afford to lag behind other major economies when it comes to the economic stimulus,” Roy said.

Slower homebuilding and the export slump mean the economy will expand 0.6 percent for all of 2008 and at the same rate in 2009, according to a Bank of Canada forecast released Oct. 23, the slowest since 1991. The bank cut its forecast from a July prediction of 1 percent this year and 2.3 percent in 2009.

“All the economists who seem worth listening to are saying you have to spend in order to get out of a situation like this,” said Laura Singleton, 49, a homemaker visiting Parliament with her family from Rainy River, Ontario. “My understanding is that we aren’t doing any measures like that at the moment. I am wondering why.”

To contact the reporters on this story: Alexandre Deslongchamps in Ottawa at adeslongcham@bloomberg.net; Greg Quinn in Ottawa at gquinn1@bloomberg.net.