As the Jan. 27 tabling of the 2009 Federal Budget approaches, most economists in Canada are predicting widespread spending on infrastructure and possible tax rebates for low-income Canadians.

Fiscal stimulus for the ailing Canadian economy is expected to total as much as $30 billion — or 2% of GDP — according to economists at RBC Financial Group and BMO Capital Markets Economics.

The package will include accelerated spending on infrastructure, aid to distressed industries and possible tax cuts, according to RBC Economics Research assistant chief economist Dawn Desjardins.

“The combination of a fiscal stimulus package worth up to 2% of GDP and the lowest rates in 50 years will be enough, in our view, to resuscitate the economy, although strained credit conditions will likely prevent the recovery from gaining steam until 2010,” Desjardins wrote in a recent report.

Stéfane Marion, chief economist and strategist at the National Bank of Canada, expects a slightly less generous package, worth $15 billion, or 1% of GDP. He expects infrastructure spending to dominate the stimulus plan, through the expediting of projects, the acceleration of uptake from the federal infrastructure fund, and more progress on the $33-billion, seven-year Building Canada plan announced in 2007.

The Conference Board of Canada expects the federal budget to add 0.3 percentage points to real GDP growth in 2009, through $5 billion in temporary tax rebates to low and middle-income Canadians, and $6 billion in new infrastructure spending. The package could also provide additional economic benefits by lifting consumer and investor confidence, according to the Conference Board’s latest economic outlook report.

Economists are urging the government to avoid over-emphasizing short-term goals in the budget.

“The litmus test for sound policy will be whether fiscal recovery plans are geared to improving long-term productivity and restoring balanced budgets once economic growth resumes on a durable basis,” economists at Scotiabank Group wrote in a recent report.

Canadian Chamber of Commerce president and CEO Perrin Beatty agrees. In a speech on Jan. 15, he said that through the budget, it’s crucial for the government to convey confidence that economic conditions will improve, and that short-term stimulus measures will help the country be more successful in the long run.

“The Minister of Finance has a tough balance to strike. He needs to demonstrate that he understands how serious the current turndown is and he must put in place measures that can mitigate its impact in our country,” Beatty said. “At the same time as he confronts our immediate problems, he must not lose sight of Canada’s longer term interests, because the global economy continues to evolve a dramatic pace and we can’t afford to take a two-year sabbatical from improving our lagging international competitiveness.”

The Chamber of Commerce recommends several measures, including additional support for Canadian credit markets, accelerated infrastructure projects that don’t face lengthy environmental assessments and other regulatory requirements, with a focus on mass transit, water treatment plants and waste management systems.

The Chamber also calls for a reduction in high marginal personal income tax rates for low-income Canadians, incentives for new business investment and improved labour adjustment programs and training for unemployed workers.

The government should avoid temporary tax rebates and further GST reductions, according to Beatty.

To ensure that the stimulus package does not kick off a pattern of persistent, structural deficits, Beatty urges the government to establish a time frame for repaying deficits incurred. Specifically, he suggests creating a reserve within the budget to cover the indebtedness when the budget returns to surplus, and restrained spending when the economy recovers.

IE