–Different Emphases On Pace Of Cutting Gov’t Spending
–Canada To Seek Clearer, More Urgent, Targets
–Differences Seen in Obama, Harper, G20 Letters

By Courtney Tower

OTTAWA (MNI) – Unusual differences between the United States and
Canada, about the best paths toward world financial recovery, are seen
in a tale of two letters leading up to G8 and G20 summit meetings this
weekend.

Letters from President Barack Obama and Prime Minister Stephen
Harper both urge the other nations to take reform actions without
backsliding. But they differ importantly on how soon and how deeply the
heavily indebted nations among them should reverse government stimulus
spending and reduce debt.

For President Obama, so-called “fiscal consolidation” for the most
indebted — the United States itself and several countries in Europe —
should only occur “in the medium term” and should be “flexible” in its
implementation. Such countries should not stop stimulating their
economies with public spending now, and should be ready at quick notice
to add more spending if recession threatens to return.

Canada’s Harper has a more urgent focus on debt reduction, in order
to reassure financial markets, currently volatile and uncertain about
the possibility of massive debt loads swamping economies and causing a
return to recession.

He wants quick action on debt reduction, so that current deficits
would be cut in half by 2013. Stimulus spending can continue at present
but there must be “clear, credible and growth- friendly fiscal
consolidation plans” to replace such spending.

Harper declared that the clear debt reduction targets he wants set
out at the G20 summit meeting of advanced and developing market
countries in Toronto Saturday and Sunday, should be minimum targets, “as
some of us will meet these objectives sooner.”

Obama, on the other hand, suggests all G20 countries should not
have to set the same targets. They should not move too quickly on
stopping government stimulation, for fear of slowing down global trade
and, therefore, U.S. exports.

Obama cautions that “it is critical that the timing and pace of
consolidation in each economy suit the needs of the global economy, the
momentum of private sector demand, and national circumstance.” He says
“we must be flexible in adjusting the pace of consolidation” lest
recession return.

For the United States, the President repeats his plan to halve the
federal budget deficit by fiscal 2013 and to stabilize American
debt-to-GDP ratios “at appropriate levels over the medium term.” He says
“sustainable public finances” must be restored by all countries, “in the
medium term.”

The medium term, often taken to be three years and more, is too far
away for Harper’s apparent sense of urgency. His chief spokesman told
reporters last Friday that Canada wants nations to start their spending
reductions no later than next year.

Canada is often seen by other G8 advanced countries as usually
singing from the U.S. song sheet. This time, positions are different on
the key debt reduction issue and, to some extent, on whether banks
and/or bank transactions should be taxed in order to build up funds to
save them from expiry should another financial crisis return.

Both agree that taxpayers should not bail out banks in future, as
they have done in the United States and Europe but not in Canada.
However, Canada opposes taxes on banks or bank transactions while the
U.S. seems ready to support some version of that, as strongly promoted
by the European Union.

The U.S.-Canada differences in emphasis reflect differences in
their economic conditions. Canada had a short but very sharp drop into
recession from the external effects on volumes and prices of its
exports. There never was anything like the housing and mortgages
disaster in the United States. Jobs declined seriously but not at the
same level as in the U.S.

Comparatively strict regulations on financial institutions,
including capital they must hold, leveraging limits, and strong
regulatory oversight, kept the nation’s banks healthy and without need
of public support.

However, the Harper government has incurred more than C$53 billion
in additional federal debt, after inheriting a decade of consecutive
annual budget surpluses from previous governments. Canadian government
preaching about restraint in spending falls with considerable irony on
Canadian ears.

The U.S. financial institution bailouts, the sub-prime mortgage
disasters, the huge deficits and consumer spending on borrowed money,
were not a feature of the Canadian condition. Exports have come back,
although not to their peak, and jobs have returned markedly, though also
not to their peak. House prices have soared, but economists say there is
no housing bubble, at least as yet.

The Bank of Canada, in a half-yearly Financial System Review on
Monday, issued warnings of risk to Canada’s economic condition but
almost all are external dangers.

The chief risk to Canada, and the world, has increased in the last
six months, according to the BOC. It is that rising global imbalances
between increasing U.S. and European debt and Asian savings led by
China, can unwind abruptly and in disorderly fashion. The BOC says these
are causing increasing world-wide fiscal strains and can create “tension
in interbank funding markets.”

Another risk, according to the BOC, mirrors Harper’s concern for
clear and specific debt reduction and financial reform commitments. The
BOC cites fear of complacency or backsliding, that countries will not
undertake with rigor the reforms they had agreed to at previous
meetings.

** Market News International **

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