Economic Policy Challenges Facing the New Canadian Government

First, and immediately, the new government must carefully monitor recent and upcoming actions by the Bank of Canada to ensure that they are adequate to stabilize financial markets. It must also be prepared to intervene wherever and however is necessary to ensure that credit conditions, financial stability, and the effective working of the financial system are maintained.

• The Bank of Canada has a wide range of authority and responsibility for interest rates, liquidity, and financial stability. It has already taken many actions, including in recent days, and stands prepared to take more.
• Specifically, the Bank of Canada has an interest rate announcement date on October 21, when it could cut interest rates by 50 basis points. It will be producing its semi-annual Monetary Policy Report on October 23.
• The government, through the minister of finance, must carefully monitor the effectiveness of these actions and stand prepared to supplement with policy actions wherever, whenever, and however is necessary to ensure the stability of Canada's financial institutions and financial system.
• The government must ensure that credit conditions are appropriate and financial transactions are working effectively.
• Specifically, the government must ensure that Canada's financial institutions and financial system have not been put at a competitive disadvantage by recent actions taken by other developed countries.

Second, within a month or so, the government must proceed with an Economic Update that will include an updated economic and fiscal forecast and contingency plans to deal with eroding fiscal conditions.

• The forecast for Canada's economic growth for 2008 and 2009 has eroded badly over the past month, let alone since Budget 2008 in February.
• Strong profits from energy companies will permit the government to reach its target of a small fiscal surplus for 2008/09. However, with shrinking oil prices as well as eroding economic growth for 2009, the government's current plan for a small fiscal surplus in 2009/10 is at serious risk.
• The Conservative government has pledged to not raise taxes, not cancel any planned tax reductions, and not present a Budget with a planned deficit. It therefore must attempt to identify currently planned spending for 2009/10 that can be postponed.
• It must be emphasized that such forecasts are very volatile these days. When a detailed, thorough economic and fiscal forecast is completed late this year, it could be more optimistic. In addition, there is a considerable amount of time to review spending plans before Budget 2009 in February. Therefore, what appears to be an impending deficit for 2009/10 based on today's forecast must be put into perspective. Certainly, however, if a deficit is to be avoided, contingency plans are in order.

Third, in Budget 2009—to be released in February 2009—the government must plan to put much more focus on economic policy actions that will strengthen the job security and incomes of Canadians over the medium term.

• The policies to strengthen Canada's economic growth prospects are well known. For the most part, they are included in the Conservatives' "Advantage Canada" document that accompanied Budget 2006, whose policy prescriptions were not significantly different than several documents released by the Liberals over the previous decade.
• Economic policies to enhance Canadians' job security and incomes are similar to the policies that will increase the standard of living (real GDP per capita), productivity, and both economic growth and potential economic growth.
• Policies to increase Canadians' job security and income growth and the productivity and potential of the Canadian economy are a mix of spending, tax, and regulatory polices. It is not as simple as cutting taxes.
• Maintaining a competitive and fair tax structure is a necessary, but by no means sufficient, policy. The business community must have a tax structure that puts it on a competitive footing with international rivals. Workers must have personal tax rates that provide strong incentives to work harder and smarter, and to pursue higher education, training, and job mobility.
• On the spending side, expenditures on infrastructure, education, and training are most critical. On the regulatory side, competition policy, financial policies, and regulations and trade policy are critical.