OTTAWA - The federal government is warning Canadians to hunker down for two lean years characterized by a slowing economy and rising unemployment.
With the U.S. slumping, the world economy sliding and tight credit markets continuing, Canada's economy will slow even more dramatically than the government had thought a mere four months ago, Tuesday's federal budget forecasts.
"Canada is not an island,'' Finance Minister Jim Flaherty told the House of Commons in handing down his third budget of the minority Conservative government.
"Some sectors of our economy are struggling and the overall Canadian economy will likely grow more slowly over the next two years.''
The government now says the economy will grow a meagre 1.7 per cent this year, down from the 2.4 per cent advance it forecast last October.
And Canada's economy will be only marginally better in 2009 with 2.4 per cent growth.
But having emptied the treasury in the fall with corporate and individual tax cuts worth about $30 billion a year, Flaherty was left with little room to add more stimulus to deal with an economy that is braking fast.
The budget projects surpluses of just $2.3 billion and $1.3 billion in the next two fiscal years -- less than would be needed to even continue the recent practice of annual $3-billion debt paydowns.
"Because the Conservative government has already spent the cupboard bare with their previous budgets and economic update, this budget does not go as far as we would like,'' said Liberal leader Stephane Dion.
Although Flaherty stressed that October's mini-budget adds $12 billion in stimulus this year, the budget does little to further boost the slumping economy -- $500 million for public transit infrastructure, $50 million a year for the ailing auto sector, and $155 million to extend the write-off on new equipment for manufacturers in 2009-10.
Canadian Labour Congress economist Andrew Jackson said Flaherty missed an opportunity to use the $10 billion he has earmarked for debt reduction this year to tackle the problems that beset the manufacturing sector.
"Heading into an economic downturn I don't see anything in there that will make a real difference,'' he said. "The assistance of the manufacturing and forestry sectors that are bearing the brunt of the downturn is very limited in scale.''
"That's barely enough to do anything,'' agreed Jim Stanford of the Canadian Auto Workers of the auto research and development fund.
The impact of the slump may be most felt in jobs. As more Canadians -- particularly in the struggling forestry and manufacturing sectors -- get thrown out of work, the country's unemployment rate will move off its current 33-year-low mark of 5.8 per cent and rise to an average of 6.3 per cent this year and 6.4 per cent in 2009.
That analysis represents the consensus of private economist views for the next two years, but the government warns things could deteriorate further.
"The risks remain mainly tilted to the downside, and there is considerable uncertainty surrounding the economic outlook,'' the budget documents states. It also notes that the U.S. economy could weaken further if consumer confidence is sapped by the continuing U.S. housing crisis, tight credit and bearish stock market.
The government makes no mention of the likelihood of a recession, saying the October and previous tax cuts will help keep the economy going.
Paul Ferley, assistant chief economist with RBC Financial Group, said the government could have gotten more "bang for the buck'' if it had reduced personal and corporate income taxes in the fall rather than cutting the GST by one percentage point.
"The government is raising some concerns that the economy could weaken even more than we assumed,'' he said. "But as long as commodity prices remain high, that will insulate the Canadian economy.''
The gloomier economic outlook is in stark contrast to the good times Canadians have enjoyed since the current economic good times began in 1991, and particularly over the past five years.
The commodities boom, which began in 2002, has contributed to a steady appreciation of the Canadian dollar and led to a significant rise in living standards, both in terms of real per capita gross domestic product increases and purchasing power. The government says living standards have risen by more than 20 per cent during that period.
The government's budget analysis suggests Canada's economy is becoming more and more dependent on commodities such as oil and wheat.
The document says the price of Canadian commodities has increased by 11 per cent since 2006, and commodities now represent 40 per cent of the value of Canadian exports.
Those rising prices have not lifted all boats. Manufacturing in particular has felt the heat from the surging loonie, dropping real output by 3.4 per cent over the past two years, with the auto, wood, pulp and paper, plastics, rubber and textile industries hardest hit.
But the strong dollar has helped curtail price hikes in Canada, increasing individuals' purchasing power. The government says the high-flying loonie will continue to eat away at prices and projects inflation to rise only 1.8 per cent this year and 1.9 per cent next.
