Although near-term deficits are inevitable, the federal government has developed a clear-cut rule to ensure that Canada does not fall into a pattern of permanent deficits, Finance Minister Jim Flaherty said on Friday.

Speaking to an audience in Toronto, Flaherty said the federally government expects to incur deficits for the next three to four years. But once the recession has passed and the federal budget is once again balanced, the government has established a rule to put every penny of surplus towards paying down deficits, he said.

“That will be the rule that we will follow to ensure that we stay away from long-term, permanent deficits,” Flaherty said.

His announcement came after Flaherty tabled the Debt Management Report for 2007–08 in Parliament earlier on Friday. The report shows that during the year, the federal debt, or accumulated deficit, was reduced by $9.7 billion to $457.6 billion. The debt level is down $105.2 billion from its peak in 1996–97.

Efforts to pay down debt and run balanced budgets in recent years helped put the government in a strong position to be able to provide major fiscal stimulus in the 2009 federal budget, Flaherty said. He noted that in the past three years, the government paid down $37 billion in debt.

“That gives us room to maneuver as we go into more challenging times,” he said.

But before the government can return to surplus territory, Flaherty warned that the country is in store for extremely challenging economic times. Canada’s debt to GDP ratio, which is currently about 29.1%, will likely surpass 32% as the recession and the corresponding deficits take their toll. It will likely take five to six years before the ratio returns to its current level, Flaherty said.

Along with most economists, Flaherty expects this year to be particularly challenging for the Canadian economy, with further contraction in real GDP.

“We’re going to have some persistently poor numbers in this quarter – the first quarter of this year – and onward into this year,” Flaherty said. “This is to be expected as we go through the depth of the recession.”

This makes it especially important for the government’s stimulus package to be implemented immediately, Flaherty said. If the spending does not reach the economy soon enough, it risks having counter-productive impacts two to three years from now by driving up inflation.

“It’s very important that the stimulus enter the economy now,” he said. Flaherty expects businesses and organizations to begin seeing the impacts of the stimulus measures as soon as April.

Flaherty warned that the government is sure to make mistakes as it hurries to implement widespread spending in the Canadian economy. But the government is willing to risk making such mistakes in order to act quickly enough to help the ailing economy, he said.

“The much greater risk is that we don’t act in time,” he said.

In particular, Flaherty said it is crucial for the infrastructure projects to get underway by spring, to ensure the six-month window for construction work is maximized.

IE