Flaherty calls on banks to lend money

Deficit will be in the $20-30 billion range: Officials

By James Wood, Glenn Johnson and Eric BeauchesneDecember 18, 2008 7:25 PM

Finance Minister Jim Flaherty on Thursday announced the appointment of an 11-member council of economic advisers, including business and academic leaders from across the country.Photograph by: Greg Pender/Saskatoon StarPhoenixSASKATOON - Canada is not only going to run up a deficit in the next few years, it will likely be bigger than predicted in a Finance Department document released earlier this week, a senior government official said Thursday.

The official, who asked not to be named, told Canwest News Service on Thursday that the deficit over four years "will be in the $20-30 billion range."

"It will depend on what happens in the U.S.," said the official. "We’re looking at something that’s in between that range."

Prime Minister Stephen Harper was expected to confirm those figures in a broadcast interview Thursday night.

"They are finally beginning to say something approaching the truth," said Liberal Finance Critic John McCallum.

"Economists have known for weeks or months that we were in deficit and the Conservatives tried to cover it up."

According to the projections buried in a new fiscal and economic update released late Wednesday after Finance Minister Jim Flaherty’s meeting with his provincial counterparts in Saskatoon, the department projected that - based on private sector forecasts - the economy will contract by 0.4 per cent next year, rather than grow by the 0.3 per cent it was projecting only a month ago. It also predicts that in the 2009-10 fiscal year, the government will post a deficit of $5 billion, which is contingent on it finding billions of dollars in savings.

The department admitted the private-sector forecasts warn the situation could be worse, with the economy contracting from the current fiscal year through 2013-14, and with the government slipping into the red this year and remaining there at least through 2013-14.

"In the department’s view, there is a risk that nominal GDP could be weaker than suggested by the most recent private-sector survey, and that the corresponding fiscal outcome would be more in line with the low scenario in the statement."

That low scenario shows the government posting a deficit of about $1 billion this year, a shortfall that steadily worsens to more than $10 billion in 2010-11. The deficit is predicted to ease over the following three years but continue through 2013-14.

The Jan. 27 federal budget will contain details of the government’s deficit expectations and how it plans to eventually rebalance the books.

"What we will do is we will set out also the way out of deficit, so it will be clear to everyone in Canada the steps that we will take in order to ensure there is no permanent deficit," Flaherty said Thursday.

McCallum, a former senior vice president and chief economist for the Royal Bank, said the fact that the government is starting out "in the hole" makes it more difficult for Ottawa to act strongly to support the economy.

"Now we have a large deficit in bad times before they do anything to stimulate the economy," he said.

"This deficit is far bigger than it needs to have been because the Conservatives spent like crazy during the good times and they got rid of the cushion," McCallum told Canwest News Service from Toronto.

Flaherty put the chartered banks on notice Thursday that he wants them to start lending out to consumers and businesses more of the cheap money they’ve been getting from the federal government and Bank of Canada.

And he wants evidence of that lending when he meets with the bank bosses in early January.

"We expect the banks to reciprocate," Flaherty said at a news conference in Saskatoon, where he was holding meetings into what stimulus should be included in the budget. "We expect the banks to provide adequate credit in Canada, not only credit that is affordable but is available . . . ."

The Canadian Bankers Association countered that the chartered banks are trying to fill in the fill in the gap left by a reduction in the credit that is available from non-bank sources, noting for example, that bank lending to businesses at the end of October was up 11.3 per cent over last year.

"But banks don’t have the capacity to do it all," it said.

"These are extraordinary times and we’re doing an extraordinary amount of consultation, but the more the better because we’re dealing with a very different time than we’ve seen in a generation in Canada," Flaherty said following meetings.

In that vein, Flaherty announced the appointment of a council of economic advisers to provide input to the Jan. 27 federal budget.

The 11-member group will be chaired by former B.C. finance minister Carole Taylor. The group will include business and academic leaders from across the country who will provide advice to the government about what sort of fiscal stimulus should be in the upcoming budget and beyond and on the availability of credit.

Jack Mintz from the University of Calgary, B.C. billionaire and businessman Jim Pattison and Montreal financier Paul Desmarais are also among the members.

The first meeting will take place before Christmas. Each member is working for a salary of $1 plus expenses.

Flaherty also said he is seeking advice from members of Parliament from all the political parties.

However, he said "there are two basic ways of stimulating the economy; one is tax reductions and the other is additional spending, like on infrastructure, and they are both on the table."

But he made it clear the government will ultimately be responsible for deciding what measures to adopt to deal with the economic and financial crisis,

"We are not going to have a public debate," he said. "We are going to welcome their advice, and the government has to make its decision about what we put in the budget and other measures."