The federal government’s fiscal stimulus package is likely to have a negative impact on Canada’s current account, and therefore the economy’s competitiveness, over the next few years, says economic research firm IHS Global Insight.

IHS says that textbook economic theory teaches that government budget balances and current account balances are linked, and that changes in the fiscal balance will cause changes in the current account. It reports that research conducted at the Department of Finance a number of years ago found a “pass-through” to the current account in Canada of about 30% over the medium term; and, it notes that Finance estimates that the fiscal measures in the most recent federal budget combined with the impact of the recession will cause the budget deficit to balloon to over $30 billion.

“Thus, fiscal deficits in the range of $30 billion will push the current account into a deficit in the range of $10 billion over the next few years,” it deduces, adding that exogenous variables such as commodity prices and international trade flows will have substantial impacts on the current-account balance as well.

“The current-account balance provides a general indicator of an economy’s competitiveness. Countries with persistent current-account surpluses are thought to be internationally competitive while those with persistent deficits are thought to be uncompetitive,” it notes.

IHS concludes that the federal government’s fiscal stimulus package is likely to have a negative impact on the current account over the next few years. “The 30% pass-through effect is reasonable. However, we are forecasting a more severe deterioration in the current account in 2009,” it says. “A number of other factors are at play, including a sharp downswing in the terms of trade from very high levels, as well as a contraction in the U.S. economy that may be as severe as any in the postwar era. These factors will weigh heavily on the current account this year.”

Some reduction in the external deficit is expected in 2010 and 2011 before a return to surplus is achieved in the latter years of the forecast period, it notes.

IE