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Ottawa must be flexible, economists warn

Some of Canada's leading economists stressed Tuesday that the Harper government must be flexible and willing to alter its deficit-cutting plans if the shakier global landscape gets much worse.

The academic and private sector economists were speaking to the House of Commons finance committee as part of its pre-budget consultations, in a hearing that took on added importance because Prime Minister Stephen Harper, Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney were scheduled to meet later in the day to discuss the global backdrop.

The economists were divided on the likelihood of another recession, either globally or in Canada, though all agreed that the economic picture has darkened and said the federal government should be prepared do whatever it takes to maintain confidence and secure the recovery.

"I think it's too early to significantly change tack at this point,'' said Douglas Porter, deputy chief economist at BMO Nesbitt Burns. "Having said that, we could have a rather dramatic change in the economy in the months ahead. I do believe the U.S. economy is in danger of a renewed downturn.''

Indeed, while Porter does not see that as a fait accompli, he noted that growth in Canada and throughout the advanced economies will be modest at best in the coming years, and predicted the Bank of Canada will keep interest rates on hold at 1 per cent until the end of 2012.

The Conference Board of Canada's chief economist, Glen Hodgson, said "flexibility" might mean pushing back Ottawa's 2014-15 target for a balanced budget by a year or two.

"I think we should be prepared to make that adjustment," he told MPs, adding later that the government should not completely rule out further stimulus spending if economic conditions deteriorate.

Hodgson also suggested the government take a look at so-called "tax expenditures," which he said cost Ottawa $100 billion a year in foregone revenue, as part of the deficit fight. The use of these expenditures, billed as tax credits to encourage specific activities like using public transit, have expanded significantly under the Conservatives.

"Let's at least be open-minded," said Hodgson, in urging a closer look at the proliferation of these credits.

The dynamic among the economists generally reflected the divide in the House of Commons. Comments from the private sector economists largely reflected the government's view that it is not yet time to change course in terms of fiscal policy. Labour economists, meanwhile, reinforced the view often advocated by the opposition NDP, which is that further stimulus spending is needed now to avoid lost jobs and an economic downturn in the short term.

Porter, who caused a bit of a stir late last week when he used a research note to criticize Harper and British Prime Minister David Cameron for urging their Group of 20 colleagues to forge ahead with austerity measures, clarified Tuesday that he was not commenting on the wisdom of planned spending cuts in Canada, yet.

"I don't believe we're seriously considering aggressive spending cuts in Canada, that was something really aimed more at the U.S. economy, where some were advocating the answer to their woes is a major contraction in the fiscal situation,'' he told committee members. "My concern now is that the U.S. doesn't focus too much on controlling their budget deficit, given that the economy is gasping for air and they've had very little employment growth in the past year or so.''

As for the rare meeting Harper and Flaherty were to hold with Carney, it seemed unlikely that any of the three men would speak publicly to the media afterwards.

While it is unusual for the government to inform the media about such a meeting, Andrew MacDougall, the Prime Minister's spokesman, said similar meetings have happened following previous G20 gatherings. Officials have said the meeting was meant to give Harper a "de-brief'' of what transpired at the gathering of G20 finance ministers and central bankers in Washington last week, amid increasing concern that the European debt crisis would not be contained in time to prevent a banking meltdown on the scale of the U.S. financial crisis of 2008.

The "PM is regularly debriefed after meetings like the ones held in Washington this past weekend,'' MacDougall said in an e-mail.

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