Flaherty in for a fight over fiscal restraint

Prime Minister Stephen Harper’s government has prided itself on being a player at the highest levels of international economic decision-making since the frightening fall of 2008. But with the world economy again looking vulnerable, Harper might have to choose between retaining that position of influence and sticking resolutely to its fiscal-austerity plan.

Calls for another round of stimulus are coming from the likes of Tim Geithner, the U.S. treasury secretary, and Pier Carlo Padoan, the OECD’s chief economist. Although Padoan didn’t single out any specific country, it’s hard not to think Canada must have been one of the countries the OECD had in mind in this plea for those in better shape to step up the stimulus: “If there are prospects for a long-lasting slowdown in activity, countries that have, or put in place, credible fiscal frameworks are in a better position to react and should do so.”

But Flaherty doesn’t see it that way at all. In the run-up to today’s crucial G7 finance ministers meeting in Marseille, France, he’s been stoutly urging anyone who cares to listen to keep the focus on medium-term deficit-reduction, even as the immediate economic outlook darkens: “Our view is that the G20 commitments made in Toronto to move towards deficit reduction, balanced budgets, are essential. We want to stay the course.”

Back in 2008 and 2009, as the G20 rallied to stave off disaster with a coordinated stimulus package, Canadian government officials often reminded me of how Canada’s relatively strong fiscal and banking fundamentals gave Flaherty and Bank of Canada Governor Mark Carney added credibility during pressure-cooker talks on what had to be done.

I later wrote about how the Harper government built on the events of 2008-2009 as they skilfully managed behind-the-scences talks that set the stage for the G20 summit in Toronto in July 2010. But I wonder if Canada won’t sacrifice the gains made over this tumultuous period—during which coordinated international economic action has looked more vital and viable than ever—if Ottawa now chooses not to lend at least some support to another stimulus push.

It’s very possible, though, that requests from Washington or Paris won’t count for nearly as much with Harper and Flaherty as anxiety at home. The surprising report this morning that Canada shed jobs in August suggests concern over unemployment here will intensify in the coming months—and against that domestic backdrop, it would be tough for any finance minister to maintain a stringent line against calls for, say, another injection of infrastructure spending.

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