Feds should run small deficit to create thousands of jobs: report

A new report issued by the C.D. Howe Institute says the federal government could create tens of thousands more jobs in the next three years if it stopped worrying so much about a tiny deficit and decided in favour of some stimulus spending.

The report written by McMaster University economics professor William Scarth argues that keeping the deficit at 0.5 per cent of GDP for the next three years could lower the unemployment rate by 0.4 per cent.

• Canada lost 9,400 jobs in June, jobless rate ticks up to 7.1%

• Minimum wage jobs pay roughly the same as they did in 1975

That would amount to about 75,000 additional jobs if the increase in government spending were done efficiently, such as on infrastructure.

Coincidentally, the Canadian economy has created only 72,000 jobs over the past 12 months.

The report notes that such a change in strategy would mean keeping the federal deficit at about $10 billion over those three years, but Scarth argues that is insignificant economically because it would mean missing the stated target of reducing national debt-to-GDP to 25 per cent by 2021 by a single percentage point.

"A government that emphasizes its commitment to protect the interests of working Canadians should not reject this opportunity to lower unemployment when it can be achieved without a serious trade-off," Scarth states.

The report cautions that such an approach is not open to the Ontario government and, in fact, is critical of the provincial Liberal's recent budget that increases the deficit as a backward step given the province's burdensome debt.

The paper, which at time reads like a primer an economics, argues that sub-national governments like provinces don't have the same ability to stimulate the economy through spending, partly because of spillage to other provinces and partly because their actions don't directly impact the country's terms of trade.

C.D. Howe economist Finn Poschmann says that is why stimulus spending in countries like Greece, which have no control over the value of the euro, tend not to work, or not work optimally.

Canadian economy continues to underperform

The recommendation that Ottawa suspend its goal of eliminating the deficit in 2015 is likely to get little traction with newly-minted Finance Minister Joe Oliver, who is following his predecessor's script in making it an overarching goal.

Reaching the target is politically critical for the federal Conservatives heading into a fall 2015 election because in 2011 Harper promised to cut personal taxes by about $2.5 billion through a form of income splitting once the budget is balanced.

But as the Canadian economy has continued to underperform expectations and employment growth has stalled, more and more voices some from unusual sources are calling on Ottawa to take a bigger role in stimulating activity.

Last month, former Bank of Canada governor David Dodge said Ottawa should take advantage of historically low interest rates to invest in needed infrastructure.

"It is thus important to realize that in the current environment of low long-term interest rates, fiscal prudence does not require bringing the annual budget balance to zero almost immediately," he wrote in a paper for the Bennett Jones legal firm.

Scarth is making the same point in his report to C.D. Howe only arguing that Ottawa should do it and Ontario, which is in fact planning to spend on infrastructure, should not.

For Ottawa, the additional spending would carry little economic or financial market penalty, Scarth says. And it would get a bigger bang for the buck.

The report estimates a 1.5 per cent multiplier effect from carrying a $10-billion deficit in essence spending $10 billion more than planned so that the economy will enlarge by about $15 billion.

Bank of Montreal chief economist Doug Porter says he might not advise a new round of stimulus spending as long as the economy is "plodding" along, but it also would not concern him.

"The market is not crying out for a tighter fiscal policy at the federal level," he explained. "If the government wheeled out a significant medium-term infrastructure program, I don't think I'd have a big problem with it they can borrow very cheaply and there's a pretty good case to be made that there's lots of demand for infrastructure."

Scarth's paper argues that while infrastructure spending would help the economy, it is important that it come from Ottawa rather than Queen's Park or other provincial capitals. It would be more effective and Ottawa, with its low debt-to-GDP ratio, can afford it, he said.