Economic statement path to prosperity ?

The federal finance minister Jim Flaherty has released an economic statement which amounts to a mini budget in Ottawa today. From a quick perusal of the document it seems clear that the Harper government anticipates an economic slowdown in the coming months largely drawn from a slowdown in the US and the high value of the Canadian dollar which today was trading at 1.05 US. The statement projects an unemployment rate of 6.1 % in the coming year which suggests that they expect the Bank of Canada to continue to refuse to cut interest rates despite   the liklihood that the US Fed will cut its rates.

As a consequence their mini budget proposes a cut in the GST of a further 1 % by January 1 , 2008, a retroactive cut in income taxes as of Jan 1, 2007 and a cut in the rate of corporate income tax in stages . At the same time they anticipate a budgetary surplus of 11 plus billion dollars this year almost all of which they allocate to debt reduction and smaller surpluses in the coming years.

Given the likely monetary stringency of the Bank their tax cut strategy will be modestly stimulative and help sustain aggregate demand in the face of the American slowdown. but their apparent refusal to put more pressure on the Bank of Canada to cut interest rates and their insistance on spending almost all of the surplus on debt reduction rather than split it between debt reduction and appropriate infrastructure expenditures - a more stimulative policy option may well turn out to be an error. We shall see how strong the underlying business cycle will be driven   by the resources and petroleum boom and the on going Schumpeterian boom in high technology. If the gods are favourable and a recession avoided the surplus is liable to be larger than expected but unemployment regrettably not as low as might have been achieved.

For the current circumstances plus the appropriate policies might have permitted a drop in the Canadian unemployment rate to as low as 4.7 %. But this would have required a much bolder initiative on the part of the Government and the Bank of Canada.