Flashback: the November 2008 economic update

What are Flaherty and Co. thinking?

By Friday afternoon, they'd had a full day to absorb it, but economists were still trying to find the logic in this week's bizarre economic policy statement by Finance Minister Jim Flaherty.

At a time when countries around the world are working to fight a global recession by stimulating economic activity through increased government spending, Prime Minister Stephen Harper's Tory government actually plans to put the squeeze on Canada's economy.

In its all-out effort to avoid running a deficit, Flaherty has promised that federal spending will be slashed by $5 billion in the fiscal year that begins next April, when economic conditions will likely be at their worst. Another $1 billion in windfall income will be banked, not recycled into economic stimulus, for a total squeeze of $6 billion.

"That's precisely the thing not to do," said Carlos Leitao, chief economist at Laurentian Bank Securities.

Rather than a balanced budget, he believes, what we need right now is new spending of $15 billion or more to do things like bail out provincial budgets and boost benefits to the unemployed. This would translate into a deficit of about the same size, but it would prevent economic damage worth far more.

"I think a lot of us were a bit flabbergasted by the government's priorities," said Douglas Porter, deputy chief economist at BMO Capital Markets. "Who exactly are they trying to impress" with the deficit-fighting rhetoric? he asked, since Canadians know very well that temporary deficits are far preferable to a deepening recession.

"This policy will not do anything to moderate the recession and it may worsen it," said McGill University economist Jagdish Handa.

The principle that government should sustain economic activity and employment by running deficits during a slump, far from being controversial, is "at the core of current economic thinking," he noted.

So what's going on here? The notion of avoiding deficits at all cost has been discredited since the 1930s, when politicians like R. B. Bennett and Herbert Hoover helped turn a financial slump into the Great Depression by clinging to such well-worn economic orthodoxy.

It's now considered a no-brainer that governments must lean against the wind, using every possible form of stimulus, from lowered interest rates to increased spending, when a severe recession threatens, as it does today. To do otherwise is to ensure a deeper downturn, higher unemployment and more bankrupt businesses.

It's hard to believe that Prime Minister Stephen Harper, who is more economically literate than most, fails to get this point. Indeed, Harper said last week that he's ready to run a deficit in order to provide Canada with the boost it will need in order to keep our recession from becoming serious.

Flaherty's contradictory message hints at disarray in a hitherto disciplined government. Worse, it sends exactly the wrong message to Canadians at a time when consumer confidence has already plummeted to the lowest level in 26 years.

And to cap it all, a couple of cynical, gratuitously partisan swipes at unions and opposition parties in Flaherty's message promise to snarl this government in bitter conflicts -- and maybe even an election -- at a time when Canada needs focus and co-operation more than ever.