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Canada Budget 2012: Moody's, Fitch Ratings Question Need For Ottawa's Austerity Agenda

Ottawa's Deep Spending Cuts Unnecessary, Ratings Agencies Say

The federal government doesn’t need to ramp up spending cuts, and implementing them could harm Canada’s economy as it struggles with weak global demand, two major ratings agencies have said.

Steven Hess, the lead Canada analyst for Moody’s, told the Wall Street Journal that there is a “risk to growth” if the government moves too quickly with austerity measures designed to return the country to balanced budgets.

With a budget deficit that amounts to about two per cent of GDP, there is “no rush” for Canada to address the problem, Hess said.

Though Ottawa has been systematically finding efficiencies in government departments since 2007, lower tax rates and the global economic crisis have forced the government into deficit spending in recent years.

Ahead of this year’s budget, expected to be tabled before the end of March, the Prime Minister’s Office has asked government departments to find 10 per cent in spending reductions.

The government has also floated the notion of reforming the Canada Pension Plan and Old Age Security, ideas that were met with political resistance before the Finance Minister Jim Flaherty softened his stance somewhat.

According to a study from the Canadian Centre for Policy Alternatives, the budget cuts will cost 60,000 to 68,000 public service jobs by 2015-2016, when Ottawa aims to have brought the budget back into the black. The CCPA estimates the cuts could raise unemployment by half a percentage point, to more than 8 per cent at the current level.

"You don't have to swallow an extremely bitter pill if you are not sick," Fitch Ratings analyst Shelly Shetty told the Journal. She suggested any acceleration of spending cuts to beat the 2016 deadline was “not required.”

The Harper government hasn’t been inflexible on its budget goals, and Flaherty has on occasion signalled he is willing to put cuts on the back burner if the economy takes a turn for the worse.

Opponents of the government’s austerity measures point to the extreme example of Greece as an indicator that cutting too quickly and deeply can damage an economy.

Greece’s statistical authority reported this week that its economy is shrinking at a 7 per cent rate, with economists laying the blame squarely at the feet of deep spending reductions as Greece struggles with an overwhelming debt load.

The shrinking economy has sent Greece into a vicious circle, where budget cuts cause reductions in government revenue, making it even more difficult for the country to pay its debts.

Though Canada’s budget shortfall isn’t comparable to Greece’s opponents of austerity argue the southern European country’s situation is proof budget deficits should be fought during times of economic strength.

The ratings agency analysts cited by the Journal nonetheless gave Canada’s government high marks for focusing on an issue they say speaks directly to Canada’s credibility on the global economic stage.

"Achieving fiscal consolidation and the balanced budget targets are important to maintain credibility," Shetty told the Journal.

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