Economist lauds use of deficit spending for stimulus

The federal plan to run up a $113-billion deficit over five years is the right move to promote economic growth, the chief economist at credit rating agency DBRS says.

The Canadian government had $1 billion in red ink last year, the lowest in the developed world, and the deficit is projected to peak next year at 1.5 per cent of gross domestic product before the percentage starts to drop, Fergus McCormick said Thursday.

“We have been impressed, overall, with the macro-economic management of Canada,” said New York-based McCormick, who was in Edmonton for one of a series of meetings across the country.

“Countries would die to be in Canada’s fiscal position … Prospects are pretty good for a successful program of fiscal stimulus.”

The Liberals have properly focused extra spending on such key areas as infrastructure and transfers to low-income households, which tends to boost output and increase consumption, McCormick said.

Canada’s net debt forms a lower share of gross domestic product (23 per cent) than any other member of the Group of Seven major industrial countries — Germany is at more than 40 per cent, while the other states are more than 80 per cent.

Countries would die to be in Canada’s fiscal position … Prospects are pretty good for a successful program of fiscal stimulus.

“Canada remains in an enviable position compared to the European countries, what Britain has decided to do leaving the European Union, (and) the U.S. (which) has struggled for some time with a political cycle that’s very uncertain.”

So far, it’s the only G7 country able to follow recommendations by the International Monetary Fund and others that with growth low, now is the time to increase spending, McCormick said.

Although some Canadians worry about the rising national debt, stimulating the economy should lead to growth and eventually bring the government’s budget back in line, he said.

“If we have learned anything from the European crisis and the Great Recession, it’s if you cut spending too much during a period of low growth and recession, it’s going to make your situation worse.”

There are possible bumps on Canada’s road to recovery. For one thing, government stimulus programs must be sufficiently efficient, large enough and enacted soon enough to create jobs and take advantage of low-interest rates, he said.

The biggest threat to the economy is long-term low or dropping oil prices, which would further cut private investment, he said.

Other risks include high household debt, rising interest rates and reversals in the United States and the rest of the world.

But McCormick feels Canada is well placed to have a healthy economy.