A new report says the federal deficit will be about $3.9 billion in 2009 unless Ottawa invokes some major policy changes.
Canada's parliamentary budget officer Kevin Page released his report Thursday, which examines the domestic impact of the global economic crisis.
Page briefed MPs on the report saying the "modest" deficit he's predicting in the fiscal year starting April 1, 2009 is based on an average reached from a survey of economic assessments.
But on CTV's Mike Duffy Live, Page said the deficit could be as large as $14 billion if the economy contracts in 2009.
In 2010-11, the report predicts a deficit of $1.4 billion and then a slight surplus by 2012.
The report also includes forecasts if a more protracted economic slowdown and commodity price correction were to occur.
Page told Mike Duffy Live that the report expects the unemployment rate to rise to about 6.9 per cent from the current rate of 6 per cent.
But he noted the unemployment situation should not be as protracted as it is in the United States.
If the economic situation improves, the report predicts the budget to be balanced in the "near term" and "somewhat higher" thereafter.
"Overall, given that the economic risks remain on the downside, our judgment is that the lower range of the budget projections represents a more likely range of possible outcomes," says the report.
In question period, the Liberals demanded to know why the Tories said throughout the election campaign they would not run a deficit. The Liberals said the Conservatives' "wild spending" policies led to the deficit, a claim the Tories denied.
"We are going through a very serious global economic downturn," Finance Minister Jim Flaherty responded, calling on the Liberals to end partisan bickering during tough economic times.
Deflation fears
The Dow and TSX fell on Thursday, in part on fears of the deflation of consumer prices.
But Don Drummond, chief economist for TD Bank, said on CTV's Mike Duffy Live that he doesn't expect Canada to go into a period of hyper-deflation similar to Japan's economic situation.
"We are seeing deflation in some market, we are seeing it in commodity prices," Drummond said. "Virtually every commodity we produce in Canada is sitting at about half the price today than it was in June or July.
"We have seen housing prices come down in many centres of Canada."
But he said that doesn't mean Canada will go into a period of persistent deflation. He said he expects prices to start rising again by November 2009.
He noted the Consumer Price Index is still up 3 per cent year-over-year.
Jobless numbers
Meanwhile, the report says Canada's unemployment rate is expected to peak next year at 6.9 per cent, not 6.4 per cent as earlier predicted. If that happens, the government will have to spend more on employment insurance benefits.
The report outlines three broad policy approaches the government may choose to implement to deal with the current downturn:
- No discretionary fiscal policy response. In the current context, this means the Government would, as it has done thus far, focus its efforts on stabilizing the financial markets and introduce no major discretionary fiscal stimulus.
- Strict adherence to balanced budgeting. The Government may choose to take measures to balance the budget. This could involve selling government assets but is more likely to require a reduction in government spending, an increase in taxes, or a combination of the two.
- Increase spending or reduce taxes to stimulate the economy in the short run. This approach aims to alleviate the difficulties of reduced incomes and higher unemployment in the short run, and may provide policymakers some additional 'insurance' if the slowdown were expected to be particularly severe.
Page said the challenge facing the Tories will be to balance short-term pressures with sustainable spending as some sectors get hit hard in the economic downturn.
Next week, Finance Minister Jim Flaherty delivers the federal government's fiscal update.
With files from The Canadian Press
