In the short term, Canada’s newly elected government must act immediately to ensure effective workings of financial markets, says Global Insight Inc. Longer term, the Conservatives must look at policies to ensure job security and economic growth.

Three serious economic policy challenges face the new government in the coming days and months, Global Insight says. Financial markets are the immediate concern, an economic update is due later this year, and next year the Conservatives will have to bring down a new budget.

“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,” it counsels.

On the monetary policy front, Global Insight points out that the Bank of Canada has an interest rate announcement due on October 21, “when it could cut interest rates by 50 basis points.”

Additionally, it says that, “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.”

“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,” it explains.

Looking ahead, Global Insight says that 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.

“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,” it says.

“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,” the firm suggests.

Finally, in next year’s budget, likely to be released in February, Global Insight says that the government must plan to put much more focus on policy actions that will strengthen the job security and incomes over the medium term.

“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,” it notes. “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,” it suggests. “On the regulatory side, competition policy, financial policies, and regulations and trade policy are critical.”

IE