MNI INTERVIEW: Canada Must Cut Deficit In Good Times: Manley

--Former Finance Minister Says BOC Has Little Room To Fight Downturn

By Greg Quinn

     OTTAWA (MNI) - Canada's budget deficits are too big and the winner of

October's election must tame them to save up spending power before the next

recession, former Finance Minister John Manley told MNI.

     The economy's current strength provides an opportunity to save without

painful austerity, he said, noting that with interest rates already very low the

Bank of Canada would have little room to ease monetary policy in the next

downturn.

     "While the economy is growing you should be trying to balance your budget

and pay down your debt," said Manley, finance minister in 2002-2003 and a former

deputy prime minister, industry minister and foreign minister. "There is a

recession coming, and we will need the resources to provide stimulus at that

point in time."

     Governments have given attention and money to small business and households

while doing little about competitiveness challenges hurting large companies

competing globally, Manley said in a phone interview. The economy is vulnerable

to global trade tensions and U.S. corporate tax cuts that wiped out an advantage

held by Canadian companies, he said.

     "It's okay to borrow to build infrastructure and to make your economy more

productive, but borrowing for tax cuts and borrowing for program spending when

the economy is in a growth phase anyway to me is imprudent," he said in an

interview on Thursday.

     "We aren't well positioning ourselves to compete in a global economy,"

Manley said. "You can't build a prosperous country based on local mom and pop

stores."

     Liberal Prime Minister Justin Trudeau last week called an election for Oct.

21, and he and Conservative Leader Andrew Scheer spent the opening days

campaigning on pitches to middle-class voters and small companies. Neither has

laid out a detailed plan to eliminate a C$20 billion dollar deficit. The

Liberals were elected last time in large part because they rejected plans laid

out by the Conservatives and New Democrats for balanced budgets.

     "We don't need to put on haircoats and go into total austerity, but we

should be very prudently paying down debt rather than building it up so that

we've got the resources when we need it," Manley said.

     --GOOD TIMES

     Canada is in unexpectedly good times this year as other major economies

struggle. Unemployment has hit record lows, wage growth has picked up and the

economy grew at a 3.7% annualized pace in the second quarter. The Bank of Canada

has resisted cutting its 1.75% benchmark rate like the Fed and ECB because of a

resilient domestic economy.

     Even so, BOC policy makers have studied the use of extraordinary tools

applied elsewhere because of the greater risk that Canada's interest rates will

hit zero to deal with future recessions.

     "Interest rates are very low, so there is not much ammunition in the Bank

of Canada for us to try to fight a sudden loss of economic momentum," Manley

said. "And we've been running deficits that I think are way too big in times of

growth and prosperity, so I just think that's wrongheaded."

     The last full budget from Liberal Finance Minister Bill Morneau focused

more on a debt-to-GDP ratio that would fall below 30%. Manley suggested that

decline is good but doesn't go far enough, even with Canada's membership in the

small club of nations that held on to triple-A bond ratings.

     Manley still keenly remembers the 1990s when many global bond investors

gave up on Canada and there were years of painful budget cutbacks to get

Canada's fiscal house in order.

     "Our debt-to-GDP ratio relative to many other countries is pretty good,"

Manley said. "We seem to be in a long-term phase of low interest rates, but we

shouldn't forget that Canadian governments aren't the United States, we aren't

the global reserve currency. Canadian governments end up having to borrow from

foreign sources. And if the day comes when they don't think you're a good credit

risk, then bad things happen to you."

--MNI Ottawa Bureau; +1 613-314-9647; email: greg.quinn@marketnews.com

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