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RPT-Economy Canada-Spare the deficit, spoil the economy?

By Russell Blinch
TORONTO, Feb 15 (Reuters) - It's with Samurai zeal that Canadian finance ministers pledge to balance the books today.

After a period of big deficits at the federal and provincial levels, politicians now would rather fall on their swords than allow a drop of red on their books.

The federal Liberals -- the keepers of the budget-cutting orthodoxy since the mid 1990s -- have managed to post six consecutive budget surpluses and have pared the debt-to-GDP ratio to 44 percent from nearly 70 percent in the period.

It's accepted cannon even at the provincial level that governments must balance the books or face the wrath of financial markets and voters.

A number of major bank economists trooped to Ottawa last Wednesday to reinforce the message, advising Finance Minister Ralph Goodale to not only balance the books but to restore the contingency and prudence reserves.

But a voice, and not out of the wilderness, has emerged to challenge what has been the unthinkable of late.

"While Washington's budgetary insanity makes Ottawa's fiscal probity all the more appealing, balanced budgets are a cross that Canadian finance ministers should not always have to bear," Jeffrey Rubin, chief economist for CIBC World Markets, said in his opening salvo in a Globe and Mail column.

And he repeated as much after meeting with Goodale: "The pendulum has shifted, in my opinion, too far, to the point where we are now losing sight of a fundamental role of fiscal policy, and I think placing an unfair constraint on finance ministers," he told reporters.

Rubin believes that without any debate Ottawa has effectively adopted a "balanced budget resolution" that turns the clock back on 70 years of economic theory and practice.

"Yet if every federal budget must be balanced, if not by constitutional amendment, then by scripture, Ottawa is setting itself up to make some huge fiscal policy errors when the economy turns south," he wrote.

KEYNES BE DAMNED?

Of course it was the economist John Maynard Keynes who gained fame for his advice to governments in the 1930s to ramp up spending to bring an end to the Depression that was gripping much of the world.

In an open letter to U.S. President Roosevelt in 1933, he called for spending on large scale projects, such as the rehabilitation of the railroads. "The object is to start the ball rolling. The United States is ready to roll towards prosperity, if a good hard shove can be given in the next six months."

Some economists, however, say Ottawa and the provinces might not be so dead set against running a deficit if the economy was contracting rather than just slowing, as it is currently. While the economy is still largely on track, they believe fiscal prudence should be paramount.

"I still think it's not a bad starting point for governments to at least try to aim to balance the budget," said Doug Porter, senior economist at BMO Nesbitt Burns.

Rick Egelton, deputy chief economist for Bank of Montreal said: "I share the government's view that you want to try to avoid going into deficit. While debt levels have come down quite a bit they are still relatively high historically."

Egelton said there will be big demands on the federal treasury in the years ahead so it is wise now to keep reducing debt levels, and if the economy does weaken monetary authorities can always lower rates to provide stimulus.

"I don't think the government is arguing that if we were to be hit with a very severe recession that the government should take fiscal action to cut spending and raise taxes."
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