Economists think the federal budget’s stimulus package is both affordable and should work. Doug Porter, assistant chief economist at BMO Capital Markets Inc. in Toronto, agrees with the Department of Finance’s estimate that it will add 1.6% to real GDP this year. Stephane Marion, chief economist and strategist at National Bank Financial Inc. in Montreal, says the right sectors — housing and infrastructure — are being targeted.

Economists also believe that Canada had to introduce a fiscal package of this size — even if it was not strictly needed — to support the efforts of the G20 countries to get the global economy moving again. The same thing applies to the measures to support credit markets.

Canada might have gotten away with spending less without damaging the economy but that would have been seen as “not pulling its weight,” when Canada is in a better position than most other countries to provide stimulus.

In addition, of course, the Conservative minority government had to provide generous stimulus or face the prospect of triggering another election.

The budget’s economic assumptions are based on a recent survey of private sector forecasts. These are critical for the revenue projections and, thus, debt projections.

Federal revenue is expected to drop 4.9% in the fiscal year ending March 31, 2010, following a 2.4% decline in fiscal 2009. Revenue will then increase an average 7% in each of the following four years. The latter are big increases but they are based on a substantial increase in corporate taxes paid in 2011-14, once the impact of the recession and the resulting loss carry forwards are past.

However, these projections are also based on average economic growth of 3% in the 2011-14 period, a robust pace that assumes a global economic recovery and a return to high resources prices, with oil expected to be in the US$80-US$85 a barrel range. If that doesn’t happen, there is a risk of revenue shortfalls.

But there are also upside risks. Assuming all the G20 countries provide large stimulus packages, it’s possible global economic growth could pick up faster than expected – potentially making some or even all of planned stimulus for 2010 unnecessary.

IE