No quick relief for the economy, Flaherty says

Flaherty told reporters following the government's throne speech that no major measures to stimulate the economy or bail out the teetering auto sector will be in next week's announcement.

"That is not a mini-budget; it's an update," Flaherty said.

The finance minister did say the update, expected Nov. 27 or 28, may contain some new measures, including initiatives to reign in government spending, however.

In the throne speech, the government noted the difficulties faced by Canada's manufacturing sector, particularly the automotive and aerospace industries, and pledged: " Our government will provide further support for these industries."

Flaherty noted that Industry Minister Tony Clement is talking to officials of the Big Three in Detroit and legislators in Washington this week and said any announcements on relief for the auto sector will emerge from those discussions.

As such, Flaherty suggested stimulus measures such as bailouts or additional infrastructure won't come next week, or possibly not until the next federal budget next year.

The statement drew immediate criticism from the Liberals and New Democrats who said the economy cannot wait until the budget.

"It just shows there's no sense of urgency here," said NDP Leader Jack Layton. "They seem to be in denial that we're facing a critical situation that needs bold action."

The NDP and other opposition parties made similar allegations during the campaign leading up to the Oct. 14 general election, which resulted in another minority Conservative government.

But industry groups also said they had expected more, particularly given the dire straits facing of the economy.

The forestry sector was especially critical that the throne speech did not directly promise measures for hard-pressed mills, which have seen their U.S. markets collapse as a result of the housing meltdown.

"The government needs to remember that forestry employs more Canadians than the auto and aerospace industries combined and contributes 12 per cent of Canada's manufacturing gross domestic product," said Avrim Lazar of the Forest Products Association of Canada.

The throne speech came the closest the Stephen Harper government has come to admitting that Ottawa will fall into a deficit next year, despite repeated assurances during the fall federal election campaign from Flaherty and Harper that there was little risk of that happening.

The government blamed a worldwide financial crisis and global economic slowdown for Canada's problems, which Flaherty described as an "unprecedented situation" for today's generation of Canadians.

But Liberal finance minister Scott Brison said the blame lies strictly with Harper and Flaherty for over-spending and eliminating the contingency "rainy day" reserve designed to keep Ottawa above the line during bad times.

Earlier in the day, Bank of Canada governor Mark Carney said Canada conceded that Canada could soon fall into a recession, often defined as two consecutive quarters of negative growth.

Flaherty said he would not take extraordinary measures - and would not raise taxes - to prevent from sliding into the first federal deficit in 17 years.

"Our aim is to run the economy effectively for Canadian families, not to artificially create a small surplus," Flaherty said. "If it means we'll run a deficit, we'll run a deficit."

However, he suggested he will not drastically increase spending, creating a structural deficit, as occurred in the 1970s and 1980s. He said the deficit will end when the economy recovers.

While Flaherty did not say how big the shortfall will be, several economists have predicted Ottawa's deficit could rise to $10 billion in the 2009-10 fiscal year, which begins in April, with only a slight improvement for the 2010-11 financial year.

Digging out of a deficit won't be easy, said Dale Orr, managing director of the IHS Global Insight forecasting firm.

"The last time we went into deficit, it took us 26 years to get out," Orr noted. "I'm expecting significant multi-year deficits."

The problem, says Orr, is that besides undermining government revenues, economic slowdowns add to expenses for such things as employment insurance payments for the tens of thousands more Canadians who will be without jobs. Also, as the national debt grows, so will the cost of servicing that debt.

RBC economist Craig Wright agreed, however, that Ottawa will be in better position to eliminate the cyclical deficit caused by a recession if it does not dig itself deeper in the hole with additional spending to create growth and boost growth.