Real battle now is stimulus-spending vs. deficit-fighting
Bank of Canada Governor Mark Carney held the benchmark Canadian interest rate steady at per cent on Tuesday. Any need for a rate hike to restrain inflation has evaporated, given the economic worries in Europe and the United States. “In light of slowing global economic momentum and heightened financial uncertainty,” the Canadian central bank said, “the need to withdraw monetary policy stimulus has diminished.” But keeping interest rates low is only part of the equation. The more crucial element is direct government stimulus spending and tax relief. To that end, President Barack Obama is expected to use a major speech tomorrow to propose more than $300 billion in job-creating spending next year, through a mix of tax cuts, infrastructure spending and direct aid to state and local governments. Obama’s plan faces a rough ride in the U.S. Congress, where the Republican House majority urges austerity. House Speaker John Boehner and Majority Leader Eric Cantor released a letter to Obama yesterday saying their objections to the 2009 stimulus, which they called a “large, deficit-financed, government spending bill,” have been validated by continued high unemployment. Weighing in against deficit-reduction, a UN report released Tuesday warns of a long global period of stagnation if political leaders insist on austerity instead of stimulus. “Those who support fiscal tightening argue that it is indispensable for restoring the confidence of financial markets, which is perceived as key to economic recovery,” the report said. “This is despite the almost universal recognition that the crisis was the result of financial market failure in the first place.”