Harper bets billions in stimulus will save economy

OTTAWA - The Harper government is breaking the bank in a desperate attempt to spend the economy out of recession.

Tuesday's federal budget makes no pretence at being anything but a return to Big Government that has Ottawa stretching its tentacles into every crevice of economic life - from how Canadians lease cars to imposing grace periods on credit card companies before they can charge interest.

The principle is that if the private sector won't spend and invest, the government must do it.

"These are extraordinary times," Finance Minister Jim Flaherty told a news conference.

'"In the past quarter, the world economy has deteriorated substantially. We consulted broadly with Canadians (and) what we heard from Canadians is that we need to do certain things right away to stimulate the economy."

If it works, the government estimates the $40 billion in stimulus through spending and tax cuts will create or save 190,000 jobs and boost the economy by 1.9 per cent over the next two years.

But that's a big if, say economists, who caution the plan could still come undone by poor execution, wrong assumptions about people's ability or willingness to spend, and slow-to-start infrastructure projects.

"It all helps, but single handedly the government is not going to turn the economy around," said Derek Holt, a senior economist with Scotia Capital.

In the short term, Holt cautions that Canadians shouldn't start expecting immediate returns on the $40 billion - meaning the stimulus won't help the economy now when it's plunging into recession and jobs are vanishing by the tens of thousands monthly.

Most of the stimulus won't start filtering through to the real economy until the second half of this year, when many economists see the start of a long and arduous recovery.

The budget does contain some short-term relief, starting with close to $2 billion a year in permanent income tax cuts, retroactive to Jan. 1, that should provide some stimulus as soon as Canadians start seeing more take-home pay this spring.

The government is also increasing the working income tax benefit, a stimulus of $580 million this year alone that goes exclusively to low-income Canadians who more likely to spend any extra cash they get.

And Ottawa is counting heavily - perhaps unrealistically - on the prospect that 4.6 million families will take advantage of its $3-billion home renovation tax credit to build a new deck or fix the bathroom.

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The benefit of the plan, said Kevin Dancey, president of the Canadian Institute of Chartered Accountants, is that most of the money will be spent in Canada. The problem is that families must ante up $10,000 to get the maximum $1,350 back in next year's tax filing - something Canadians uncertain whether they will be the next to get a pink slip may not be willing to commit.

The remaining big spending measure is the almost $12 billion the government plans to spend on a wide variety of infrastructure projects, although much of that spending is dependent on receiving matching funds from provinces and municipalities. And many projects won't get a shovel into the ground that creates jobs for months or not until next year.

Flaherty said the government intends to give provinces and municipalities two years to match the federal offer of they will "lose" the opportunity, saying the added infrastructure fund won't be extended beyond the two-year window.

But he added he has heard from provincial ministers that the money is needed and will be used.

Efforts to increase lending for home purchases, car leases and for business investments will also help stimulate the economy in that they go to the heart of the economic malaise - the global credit crisis that is keeping economies around the world pinned to the ground.

And unless the global economy recovers, said Dancey, neither will Canada.

"There is only so much Canada can do by itself, it is a small economy. We will succeed depending on how the world succeeds."