Federal and provincial governments should respond to the credit crisis by using public sector financial institutions to give firms alternative sources of credit, and by running short-term fiscal deficits to stimulate the slowing economy, the Conference Board of Canada argues in a new briefing released Wednesday.

“The global financial crisis presents two immediate policy issues-keeping the domestic economy afloat, and providing firms with access to credit,” said Glen Hodgson, senior vp and chief economist.

“There is a strong case for fiscal deficits when needed, and Canada’s strong fiscal position over the past decade has given governments the capacity to stimulate the economy now, when it is sorely needed.”

To ensure that Canadian firms have access to credit, the federal government can turn to three strong and well-managed public-sector financial institutions, the Business Development Bank of Canada, Export Development Canada and Farm Credit Canada. “These institutions exist to fill gaps in the financial marketplace, and they are well-suited to meet the financing needs of the Canadian business community at a time when credit conditions are not normal,” said Hodgson.

Governments can also strategically offer loan guarantees to businesses. The North American auto industry, in particular, is in need of financial assistance, the Conference Board says.

In addition to running short-term deficits, and an enhanced commitment to infrastructure spending, governments could also target fiscal initiatives to sectors in need of assistance, the Conference Board suggests.

For example, tax cuts in provinces and for sectors most affected by the downturn would be preferable to a one-time, across-the-board federal tax cut.

Other options include: reducing eligibility barriers to federal programs such as employment insurance, which currently disadvantages Ontario compared to other regions; and beefing up adjustment programs for displaced older workers.

The briefing, Fending Off a Canadian Recession: What More Can Be Done, is publicly available at www.conferenceboard.ca.

IE