How much stimulus can we really expect?

Why the budget will generate only a quarter of the economic activity that the government told us it would

The new TD Bank Financial Group economic forecast, released yesterday, is mainly drawing attention for its worrying employment outlook. But the forecast is also worth paying close attention to for its skeptical view of the government’s predictions about how much the Jan. 27 budget will boost the economy.

As recently as late last year, TD’s economists were predicting about 250,000 Canadian jobs would be lost in 2009; this week they’re telling us to brace for 324,000 jobs to vanish. That would push the unemployment rate to 8.8 per cent, up from about 6.6 per cent today.

What caught my eye about this grim report is how the TD economists—who run one of the most closely watched forecasting shops in the business—discounted the government’s upbeat assumptions about the recent budget’s stimulus package.

(You remember the budget? Large sums, long speeches, hundreds of journalists locked up in a room reading charts and tables? Cut yourself some slack if it all slipped your mind: we in the news business tend to treat budgets like nothing matters more for a day, and afterwards as though nothing could matter less.)

Finance Minister Jim Flaherty claimed the budget would inject $29.3 billion in stimulus into the economy this year, or about 1.9 per cent of gross domestic product. How seriously did the TD economists take him? Not very: they figure his fiscal stimulus will amount to only 0.5 per cent to GDP in 2009.

I asked Beata Caranci, TD’s director of economic forecasting, why she’s assuming the budget will generate only about a quarter of the economic activity in 2009 that the government told us to expect. She cited several factors behind her lower estimate. Tax cuts meant to boost spending might actually go into savings. Provinces and municipalities might not come up with their expected share of infrastructure money as fast as Ottawa hopes.

Even the tax credit for home renovations, which was greeted with some enthusiasm, is viewed cautiously by Caranci. “That might just go to people who were already planning to renovate,” she said. “So how much additional spending that creates remains to be seen.”

That sounds sensible. And, more broadly, Caranci said the history of government bids to stimulate shows that politicians, not surprisingly, tend to be a tad too optimistic about how efficiently they can juice a slumping economy. “There’s always leakage that occurs,” she said. “So we’ve been more conservative.”

What was touted as big stimulus, requiring huge deficits, on Jan. 27 might not look so aggressive as lousy economic news drags on month after month.

Even if you accept Flaherty’s stimulus figures, Ottawa looks positively tentative compared to Washington. Stephen Harper’s government is planning 2.5 per cent of GDP in stimulus spending over the next two years, compared with the approximately 6 per cent of GDP being pumped out by the new-look U.S. government.

Jeff Rubin, chief economist and strategist at CIBC World Markets, told me the main number to watch, when it comes to predicting political reaction to economic news, is that troubling unemployment rate. As it rises above 8 per cent by the end of this year, he said, the public clamor for governments to spend even more heavily, to try to save and create jobs. will become impossible for politicians to resist.

And Rubin argues the pressure will mount even if the GDP is growing again by late this year or early 2010, as some forecasters, including the Bank of Canada, say it will be. That’s because unemployment is likely to remain high even after the economy starts healing, so any easing of public anxiety will lag the technical end of the recession.

“It’s not about the GDP forecast. It’s about the unemployment rate,” Rubin said. So how does he anticipate the Canadian government will adjust? Whether Conservative or Liberal, by spending enormous sums for years to come. “The era of surpluses,” Rubin said, “is over.”

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