Ottawa should limit deficit to $22B next year: TD Bank

Canada should limit next year's budget deficit to $22 billion even as it boosts spending to deal with the world economic downturn, TD Bank's chief economist said Friday.

But even that amount of red ink will not totally shelter Canada from the global financial storm, Don Drummond said.

"It's not going to make a horrific difference to most Canadians.... We do have physical limits to what we can do," he told CBC Newsworld.

In recent days, Prime Minister Stephen Harper has begun talking about running a deficit in the range of $30 billion in the next fiscal year — an amount Drummond called unrealistic.

Instead, Ottawa should add a maximum of about $12 billion in extra fiscal stimulus, bringing the final shortfall to $22 billion, Drummond said.

That would equal three-quarters of one per cent of the national gross domestic product, he said.

Earlier prediction coming true

Back in October, TD had forecast the government would run a budgetary deficit for 2009-10 in the range of $10 billion.

The big bank's rationale was that Ottawa, which was still predicting a surplus at the time, had underestimated the amount that federal revenue would shrink as Canada's economy slowed.

Now the government is eyeing accelerated infrastructure projects and temporary tax relief as its weapons of choice in battling the economic downturn.

These options, however, have their own difficulties, Drummond said.

It takes time for new projects to "get shovels in the ground," he said, making any near-term positive gain from this type of spending marginal.

As well, temporary tax relief "just doesn't work," Drummond said.

People tend to save rather than spend extra cash gained from a time-limited reduction in income tax rates, he said. And buyers will only spend cash as long as a temporary sales tax cut stays in place.

Once that holiday disappears, so will consumer interest in populating retail stores, Drummond said.

Limited financial weapons

Canada suffers from being a small country economically, tied to the sputtering U.S. giant, say Drummond and other economists.

As a result, Ottawa can only do so much to stimulate the Canadian economy, they say.

Canadian GDP growth2009BMO -2.1RBC 0.0 TD Bank -1.4 Source: Various bank forecasts

RBC Economics reinforced this line of thinking Friday by cutting its earlier forecast of marginal economic growth for Canada in 2009 to zero. If true, that non-growth would come on the heels of a 2008 in which GDP would expand by only 0.6 per cent.

Even at zero, RBC remains one of the more optimistic of the Canadian forecasters. TD Bank, for example, believes the Canadian economy will shrink by more than one per cent in 2009.