Wednesday, February 15, 2012

More budget homework for Flaherty

This is a story that may have been glossed over in the past few days but is worth noting: "Rating Firms Question Canada's Planned Budget Cuts." Two of the major ratings agencies, Moody's and Fitch, are warning the Harper government away from large budget cutting plans:
Steven Hess, Moody's lead analyst for Canada, said that with a budget deficit of around 2% there is "no rush" for the Canadian government to return to fiscal balance.

"From our perspective there is leeway there and doing it [cutting] too rapidly has negative effects and can be counterproductive as revenues grow" more slowly, he said. "It is a risk [to growth] if they move too fast," he said.

The Canadian economy is already seeing headwinds. Consumer debt is now at record highs. Economists worry households are tapped out. Slower-than-expected global growth, meanwhile, threatens to crimp Canada's exports to the rest of the world.

"You don't have to swallow an extremely bitter pill if you are not sick," said Shelly Shetty, an analyst at Fitch Ratings.

In particular, Ms. Shetty said that any attempt by Canada to reach a balanced budget earlier than its current target of 2016 is not "required."
The ratings agencies do have their critics. There are two on the same page here, however, and it's in line with what the Parliamentary Budget Officer was saying last week, in the context of OAS fiscal sustainability.

More markers being laid down for Flaherty. Are they going to be all about the axe or will they listen to such messages being sent about the need to foster growth? Do they have more than one tool in their toolbox? Stay tuned...