OTTAWA - The Conference Board of Canada says Ottawa should inject $10 billion to $13 billion in additional spending into the January budget to support the struggling economy.
The Ottawa-based think-tank said Tuesday that this stimulus would combine with billions in lost tax revenues to create a deficit of $20 billion or more in the next fiscal year.
"But that is a price worth paying for a faster recovery and a return of consumer and investor confidence," said Conference Board economist Glen Hodgson.
The Conference Board says monetary policy -- interest rate action by the Bank of Canada -- may be reaching its limit of effectiveness and more is needed to jolt the economy back into growth.
"Governments can't afford to wait 18 months for the full benefit of lower interest rates to kick in," Hodgson stated.
"Complementary fiscal action must now ride to the rescue. Fortunately, Canada is in a much stronger fiscal position than most other nations and can easily absorb fiscal deficits over the near term."
Canada's economy has grown only marginally for much of the last year and is now in recession, with little growth expected before late 2009. Unemployment is expected to rise above seven per cent next year, with continued weakness in mining, oil and gas, forestry and manufacturing, especially the auto sector.
The central bank has cut interest rates by 1.5 percentage points this fall to encourage borrowing, spending and business investment. But the Conference Board says rate cuts take a year and a half to fully kick in, and the economy can't wait.
It says federal government stimulus equal to as much as one per cent of the economy should be targeted toward shovel-ready infrastructure projects, ensuring companies have access to credit, and putting cash into the hands of people who urgently need it.
The Conference Board's call for lavish deficit spending comes as many other groups urge Finance Minister Jim Flaherty to get more money into the economy to stimulate activity.
Bank of Montreal economists called on Flaherty last week to pour $16 billion into a stimulus package in the Jan. 27 budget.
Among specific measures, the Conference Board recommends:
- Immediately increasing direct support to the unemployed, since they will spend the money quickly
- Additional financial support to low-income people
- New programs for workers directly hit by the recession.
"Put money in the hands of Canadians who are going to spend it, particularly low-income Canadians," Hodgson said in an interview.
"And that's why we talk about the working income tax credit and the child tax benefit as tools that could be used right away."
He added that government action could counteract what he sees as a problem of low expectations.
"A lot of this is psychological, as well as the real spending in our economy," Hodgson said.
"And if governments are bold and announce bold initiatives, that will help to shape a better attitude in everybody."
Hodgson also said measures to loosen up the frozen commercial credit market would help companies borrow to invest and create jobs.
"The trouble is credit conditions are not normal, banks are not passing along the full rate cuts because they can't -- their cost of funds has gone way up so they're preserving cash just like everybody else," he said.
"There are a lot of signs that monetary policy is not providing all the juice required. In fact, if you look at the behaviour of governments around the world, they're all turning now to deficit spending, to fiscal stimulus, to get their economies going."
