Amid building fear of a global financial crisis and return to recession, the federal Conservatives’ commitment to deficit reduction is facing heightened scrutiny.
Speculation swirled around a Tuesday afternoon meeting of the troika leading Canadian economic policy -- Prime Minister Stephen Harper, Finance Minister Jim Flaherty and Bank of Canada governor Mark Carney.
The meeting came after a day on Parliament Hill in which Harper was encouraged to consider a less aggressive deficit cutting program.
As per the Conservative election platform, the government has pledged to return to balanced budgets by 2014-15.
In Question Period on Tuesday, Mr. Harper defended the fiscal course as "expansionary" and the budget savings as "modest."
Also on Tuesday, Canada’s Parliamentary Budget Officer Kevin Page said the restoration of fiscal balance is on track, with federal government spending in the year’s first quarter in line with budget forecasts.
"The overall trend in federal expenditures is generally consistent with the plan outlined in Budget 2011," the budget office said in a report.
But with a Greek default all-but assured, threatening devastating financial fallout, combined with the double-dip recession stalking the United States, the prime minister’s tone has begun to reflect a darkening outlook.
Without co-ordinated international economic action, “we will not avoid a recession,” he said last week in a speech to the House of Commons.
Flaherty has previously said the government has the flexibility to change tack should a "dramatic deterioration" befall markets.
While that has yet to occur, the government needs to exercise caution, a group of economists told a Commons finance committee on Tuesday.
"These are exceptional circumstances, so we should be prepared to change direction", said Glen Hodgson, chief economist at the Conference Board of Canada.
For the time being, modest growth and sideways unemployment movement are likely to continue to characterize the Canadian economy. Not yet enough to warrant a reversal of fiscal policy or the resumption of stimulus spending.
On the monetary front, meanwhile, Bank of Canada senior deputy governor Tiff Macklem cautioned against premature monetary tightening.
"As the Canadian recovery has progressed, we have emphasized that we would be prudent with respect to the possible withdrawal of any degree of monetary stimulus," he said Tuesday in a speech in Vancouver.
In addressing European leaders, the central banker called for a lending facility sufficient to backstop vulnerable member states and a capital plan to insulate the financial system.
