Canadian Economy Crisis Issues - Essay Example

The Canadian Economy The world economy is currently in a crisis which is reminiscent of the Great Depression of 1929. The United s has been hit quite hard with the credit crunch and the mortgage crisis which led to a large decline in that country’s economic standing. Importantly, the ramifications of economic instability in the United States could be felt throughout the developed world. How has the Canadian economy weathered the economic storm during this period of global economic contraction? What can the world learn from the Canadian economic model and has it been successful? Seeking to explain these question and others that deal with the first global economic crisis in the twenty-first century and the response of the Canadian government as well as the Bank of Canada to this crisis, this research paper will explain and evaluate the policies of both branches of government. Australia is presently doing well financially, as are a whole bunch of other countries which have been able to deal with the effects of global economic crisis while successfully managing their economies. As this project is being typed, the Canadian dollar is close to $0.97 USD, which remains high and is perceived by some as an indication that the Canadian economy is doing well. Is this the case? This question is explored below (CBC, 2009). On July 23rd, 2009, the Bank of Canada released its quarterly Monetary Policy Report and enthusiastically announced that the recession that had afflicted Canadian businesses and the Canadian economy since the start of the global credit crisis was “over”. Showing that Canadian economic growth was slated to be 1.3% in the current fiscal quarter, the days of a shrinking economy were descried as a thing of the past. While unemployment continued to rise, Canadian growth was projected to be positive after three quarters of economic decline and Mark Carney, Bank of Canada governor announced to reporters that “We are on track for the recovery both in Canada and globally,". Speculation that growth will continue through 2009 and 2010, leading to a striking gross national product growth rate of 4% by the middle of 2010, enthusiasm was the result of this mid-summer announcement. Optimistic forecasts by the Bank of Canada has assured the electorate of a 3+ growth rate by 2010; this is ahead of forecasts by the International Monetary Fund and some of the major banks in Canada including ScotiaBank, Royal Bank and the CIBC. What accounts for the positive announcement and the fact that the Canadian economy is expected to get out of the red and show positive growth for the first time in four quarters? (CBC, 2009). According to the Bank of Canada Governor, "stimulative monetary and fiscal policies, improved financial conditions, firmer commodity prices, and a rebound in business and consumer confidence are spurring domestic demand growth." (CBC, 2009). Many factors can account for this positive announcement and they include macroeconomic policies implemented by both the Federal Government in Ottawa and the Bank of Canada in harnessing the economic potential of this country. With falling inflation due to energy prices and a rising loonie, it appears as though the Canadian economic is once again on track for fiscal growth. As mentioned by Mark Carney Bank of Canada governor, simulative policies by the government have directly contributed to a strengthening of the Canadian economy. According to many international financial watchers, the Canadian economy remains on strong footing, largely due to successful macroeconomic policies implemented by Ottawa. Following his participation in annual meetings of the World Bank and the International Monetary Fund, Finance Minister Jim Flaherty was awarded Finance Minister of the Year by Euromoney magazine. This award was given in Istanbul, Turkey and was in response to Canada’s proactive handling of the global economic crisis. Strong macroeconomic policies in the wake of the global crisis have allowed Canada to weather the economic storm and experience positive growth for the first time in four quarters. Describing Canada as a “role model” for other nations, Canada’s economic policies included a stimulus package at the onset of the global credit crunch and effective regulation of the country’s banking systems. Responsible fiscal management by the government has led to the World Economic Forum to describe Canada’s banks as the world’s “soundest”. Ottawa’s Economic Action Plan provided strong fiscal involvement for the federal authorities in the running of the economy (Department of Finance Canada, 2009). What does Canada’s Economic Action Plan contain? Described as one of the “largest fiscal stimulus packages in the world”, Canada’s Economic Action Plan is the federal government’s response to the world economic crisis. Entailing a variety of measures to undue the damage caused by the international credit crunch, Ottawa announces that 90% of its stimulus package is committed during this fiscal year. Canada went into the financial crisis in relatively good economic standing, with the lowest debt to GDP ratio out of all Group of 7 countries and sought to hamper the effects of the global recession which began in 2007. That year, the Canadian government implemented a series of tax cuts in order to help stimulate the economy and provide money in the hands of Canadians to spend as they saw fit in uncertain economic times. These permanent tax reductions amounted to $65 billion. They were anticipated and actually part of the Conservative Party of Canada’s plan to cut the tax burden on Canadians to Ottawa. This includes the important, and quite popular, decision by authorities to but the infamous GST (Goods and Services Tax) from 7% to 5%. Cutting the GST has allowed for an increase in consumer spending, contributing to a cash injection into the economy and helping Canada handle the economic storm. What is important to note is that some of the Canadian fiscal policies in response to the global economic crisis, such as cutting the national sales tax, have been emulated elsewhere as sound fiscal policy. Accordingly, the United Kingdom followed suit ad cut its own national sales tax in order to stimulate its economy, following the lead of Canada. Economic business conditions are also being targeted as Canada aims to have the lowest corporate-tax rates among G7 industrialized countries within the next few years. Other fiscal policies implemented by Ottawa include paying down the debt, and the federal government reports that the government under Stephen Harper has been reduced by $37 billion since 2006. The Canadian government has also acted to strengthen Canada’s financial system, also reportedly one of the strongest in light of the global economic crisis. Canada has a strong banking regulatory market, in comparison to the United States. Due to the fact that the mortgage crisis precipitated the economic crisis in the United States, the Canadian government has responded by requiring a 5% minimum down payment for government-backed mortgages. This is to ensure that the financial mismanagement and unregulated environment which were features of the US mortgage system do not take root in Canada. As we have show, an interventionist federal government with strong economic policies has paved the way for the sound running of the Canadian economy in times of global economic upheaval (Federal Government of Canada, 2009). Concluding Remarks As this research paper has persuasively demonstrated, the Canadian government, in conjunction with the Bank of Canada, have quite successfully run the Canadian economy over the past two years. A variety of economic policies have ensured that the Canadian economy has remained vibrant despite the global economic crisis and an interventionist government has played an important role in helping keep the Canadian economy afloat during times of international economic upheaval. Macroeconomic policies aimed at stimulating the economy include a tax cut on the national sales tax for all Canadians so as to inject more money into the economy and government policies aimed at ensuring that the crisis which affected the United States does not occur north of the border. The fact that Finance Minister Jim Flaherty was recently awarded Finance Minister of the Year by Euromoney magazine explains how and why Canada’s economic recovery is a model for other countries around the world. Canada has also benefited from its close proximity to the United States and the preferential geographic position it had found itself. Today, countries are looking to Canada as a model for economic development in times of economic crisis. The Canadian model shows that regulation of key financial sectors is important and that an unregulated financial market, such as the US mortgage market prior to the bust, is bad for consumers and bad for the economy. Canada has a conservative government in power who remains committed to debt reduction and cutting taxes. This is positive for the Canadian economy and future projections for Canadian growth. All in all, Canada represents a model to copied in the first global economic crisis of the 21st century. Whether other countries copy the Canadian example remains to be seen but what is important is that Canada’s way has worked and it is finally being acknowledged after so many years in the shadow of the United States. REFERENCES Action Plan. 2009. Federal Government of Canada http://www.actionplan.gc.ca/eng/feature.asp?featureId=4 (accessed October 25, 2009) Canada Receives More International Kudos for Its Strong Fiscal. (2009). Department of Finance, Canada. http://www.fin.gc.ca/n08/09-096-eng.asp (accessed October 25, 2009) Deslongchamps, Alexander. 2009. IMF Says Canadian Dollar’s Strength Could Be Drag on Growth. http://www.bloomberg.com/apps/news?pid=20601082&sid=ay28m04Uv8J8 (accessed October 25, 2009) Fournier, Chris. 2009. Canadian Dollar Depreciates Most in Month on Carney’s Comments. http://www.bloomberg.com/apps/news?pid=20601082&sid=a8.txRDteZ9Q (accessed October 25, 2009) Recession over, Bank of Canada says. 2009. CBC.ca. http://www.cbc.ca/money/story/2009/07/23/bank-canada-economy-recovery.html (accessed October 25, 2009) Read More