Shrinking the GDP is more Flaherty's style, as Flaherty is a known destroyer of Canadians' wealth

GDP set to shrink, Flaherty says

Finance Minister's new forecast shows all hope of even a small 2010 surplus is gone; provincial counterparts cautiously hopeful after meeting in Saskatoon reaches consensus

KEVIN CARMICHAEL

With reports from Shawn McCarthy in Ottawa and Bertrand Marotte in Montreal

December 18, 2008

SASKATOON -- Finance Minister Jim Flaherty, who has been criticized in recent weeks for failing to acknowledge the depth of Canada's economic malaise, is now publishing the grim reality for all to see.

In an unusual move, Mr. Flaherty yesterday revised the government's official forecast for economic growth just three weeks after the Finance Department's traditional autumn update for Parliament.

Canada's inflation-adjusted gross domestic product will shrink 0.4 per cent in 2009, according to the Finance Department's average of 16 private-sector forecasters, which would be the first contraction on an annual basis since the early 1990s.

At the end of November, Mr. Flaherty was counting growth of 0.3 per cent next year. While meagre, the prospect of at least a little expansion left Mr. Flaherty confident enough to say a small surplus was possible in the fiscal year that ends March 31, 2010.

That hope is now gone.

"There will be a deficit," Mr. Flaherty told reporters after a meeting with his provincial and territorial counterparts. "2009 is going to be a difficult year for Canada."

Mr. Flaherty was under pressure from political opponents, especially his critics in the opposition Liberal Party, to provide a clearer picture of Canada's economic prospects amid a global recession and international credit crisis that has forced banks to record financial losses of about $1-trillion (U.S.) over the past year.

The assumptions in the federal government's fall update typically stand until Finance officials complete the budget several months later. With the global economy stuck in a downward spiral, Mr. Flaherty said he had no choice but to restate the assumptions he will be using as the basis for an economic stimulus budget set for release on Jan. 27.

Mr. Flaherty said the revision was the result of the rapid deterioration of the global economy, which institutions such as the International Monetary Fund and the World Bank say is in recession; the collapse of the U.S. housing market; and the "largest, most rapid" plunge in commodity prices in history.

The dire outlook appeared to inspire a new air of co-operation between Mr. Flaherty and the provincial ministers, who tend to bicker as often as they agree.

"It was a constructive meeting," said Quebec Finance Minister Monique Jérôme-Forget. "Everybody wanted to co-operate."

Ministers were universal in their support for new infrastructure spending, and pledged to work together to speed up the approval of projects that have potential to get billions of dollars into Canada's sputtering economy.

They also said they would look at ways to make it easier for companies to get credit, a pledge that was accompanied by accusations that the country's banks are hoarding cash and maintaining higher than necessary borrowing rates.

"There was a feeling they could be doing more to get credit to business," said Manitoba Finance Minister Gregory Selinger.

Still, the unanimity didn't yield concrete proposals and Mr. Flaherty refused to say how big his stimulus package will be.

To be effective as economic stimulus, the money governments spend on infrastructure must spend within 18 months, said Mario Iacobacci, director of the Conference Board of Canada's Centre for Transportation Infrastructure.

That gives an advantage to projects that already have been studied.

Officials should focus on these types of projects because there isn't time to analyze new proposals. Even if the cost-benefit analysis is complete, government officials still are obliged to review the proposals to ensure the spending is as effective as possible.

"You are going to be asking the policy people in the government to work a lot of overtime," Mr. Iacobacci said in an interview from Ottawa.

For some provinces, infrastructure isn't the only focus.

In Saskatoon yesterday, Alberta Finance Minister Iris Evans called on Ottawa to reverse its decision to phase out a tax break for oil sands extraction, and to extend the writeoff to upgraders.

Companies have postponed or cancelled as many as seven proposals to build upgraders - which process raw bitumen into synthetic crude oil - and have slashed capital budgets needed to expand oil sands production.

Ms. Evans said Alberta wants to see a resolution to the current disagreement between the province and the federal government on regulation of greenhouse gas emissions, and some tax breaks for the industry. On the eve of the finance ministers' meeting, Alberta Premier Ed Stelmach sent an open letter to Prime Minister Stephen Harper, urging the federal government to help improve the investment climate in the slumping oil industry.

The Quebec government said it is providing $1-billion in loans and loan guarantees to help companies get through the current credit crunch and economic slowdown.