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Cablegate: Canadian Finance Minister Announces Canadian Economy

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ZNR UUUUU ZZH
P 282120Z SEP 09
FM AMEMBASSY OTTAWA
TO RUEHC/SECSTATE WASHDC PRIORITY 9891
INFO RHEHAAA/WHITE HOUSE WASHDC
RUEAIIA/CIA WASHDC
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RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASH DC
RUCNCAN/ALL CANADIAN POSTS COLLECTIVE

UNCLAS SECTION 01 OF 02 OTTAWA 000756

STATE FOR E, EB/DCT, WHA/CAN

STATE PASS USTR (SULLIVAN)

COMMERCE FOR ITA/MAC (WORD)

TREASURY FOR IA (NEPHEW)

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN ETRD EINV EIND PREL PGOV CA
SUBJECT: Canadian Finance Minister Announces Canadian Economy
Restored to Pre-Recession Growth and Deficit Levels by 2015

Ref: Ottawa 0116

SENSITIVE BUT UNCLASSIFIED. PLEASE PROTECT ACCORDINGLY

1. (SBU) Summary: The Canadian government's plan to eliminate the
nation's budget deficit and return to pre-recession growth rates by
2015 without cutting spending or raising taxes is leaving some
economists scratching their heads. Ottawa observers suggest that
the optimistic forecast is an attempt by the Harper government to
bolster support for its economic recovery plan in anticipation of a
possible autumn election. End summary.

Canada's Milder Recession
-------------------------

2. (U) Canadian Finance Minister Jim Flaherty released the
government's quarterly Update of Economic and Fiscal Projections on
September 10, 2009. The report contained revised growth, debt and
inflation projects based on the government's own analyses and
combined with those of private (mostly banking) sector economists.
The government predicts a near-complete economic recovery within
five years.

3. (SBU) Since the onset of the global recession last autumn, both
the Finance Ministry and the Central Bank have presented very
optimistic assessments of the state of Canada's economy (reftel).
These estimates have regularly been revised downward shortly after
their release but also after media attention has moved on to other
issues. Ottawa watchers speculate that the government's
effervescent forecasting has been meant to bolster public and
investor confidence. The impact of the recession has been less
severe in Canada because of the strength of the financial and energy
sectors and limited exposure to sub-prime credit instruments.
Canada's relatively strong position among the G8 economies has
helped the government to justify its 'glass half-full' messaging
even during the worst days of the economic crisis. To be fair, in
the early-mid stages of the recession, it was difficult for
policymakers here (or anywhere) to make accurate near-term
predictions; in Canada, when they did do so, they adopted the rosier
possible outcomes.

Growth and Fiscal Predictions
-----------------------------

4. (U) In February, Bank of Canada Governor Mark Carney forecast a
1.2 percent contraction of the Canadian economy in 2009 followed by
a 3.8 percent rebound in 2010. By July, the government's estimates
of the recession's magnitude nearly doubled for 2009 to 2.3 percent.
Similarly the hopes for growth in 2010 were scaled back to 3.0
percent. (Private sector forecasters are suggesting that Canada
should expect somewhere in the region of 2.5 percent growth in
2010). The Central Bank also predicted in July that economic growth
in Canada would turn positive in the third quarter of 2009. Right on
schedule, Prime Minister Harper announced on September 20 that the
recession had technically ended. However, he warned that the
recovery was fragile while unemployment remains at its highest
levels since 1998 at 8.7 percent.

5. (U) On the fiscal side, the government now predicts that the
budget deficit will peak in 2010 at C$55.9 billion and then decrease
incrementally to around C$5.2 billion in 2014 (disappearing entirely
in 2015). Minister Flaherty notes that with overall government
spending estimated at about C$300 billion in 2014, C$5.2 will be a
Qspending estimated at about C$300 billion in 2014, C$5.2 will be a
modest challenge to deal with in the overall context. Comment: The
last time the budget was in deficit was in 1997 and Canadians are
wary about returning to a period of persistent deficits that could
affect national credit status. End comment.

6. (U) While growth rates and the deficit are predicted to return
to pre-recession levels by 2015, the lingering legacy of the
economic crisis will be an increased national debt - estimated to
climb from C$464 billion in 2009 to C$628 billion in 2014, if
government forecasts are correct.

Econo-magic
-----------
7. (SBU) The government plans a six-year recovery period for the

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Canadian economy without raising taxes or cutting program spending.
Given that these statements were made just prior to a critical vote
in the Canadian Parliament that could have defeated the Harper
government, EMIN sought the views of economists outside of the
Finance Ministry for an alternative assessment of the government's
predictions. The two economists (one from a government crown
corporation and the other from an Ottawa-based think tank) said it
was their understanding that the Prime Minister's advisors had
instructed Finance officials to construct a scenario in which the
deficit could be eliminated without taxes or cutting spending. To
achieve this, Finance Canada economists aggregated a number of
best-case projections for how the deficit could be eroded through a
combination of inflation and increased tax revenues generated
through economic expansion. While the resulting analysis provided
the Prime Minister with the economic story he was after, EMIN's
contacts were skeptical about the government's capacity to deliver
on its promises.

© Scoop Media

 
 
 
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