The Euro is in crisis and the U.S. is confronting a decade of slow growth and high unemployment. We discussed the prospects for these two areas in a blog we wrote last August (http://www.3dpolicy.ca/content/what-mess-euro-and-us-are-and-it-won-t-get-better-soon-how-should-canada-respond). The Prime Minister and the Minister of Finance are urging the EURO area countries to take the tough political decisions necessary to avoid financial and economic collapse in Europe with dire consequences for the global economy.

They are correct to do so. But the time has come where the government must begin planning a budget on the assumption that the best outcome will not happen. The government must be proactive when confronted with major downside risks - not reactive.

These are our recommendations to the Prime Minister and the Minister of Finance.

The Prime Minister should announce that the Canadian economy is now confronted with serious global economic and financial risks and that the Minister of Finance will outline a new Economic Action Plan to support economic growth and job creation that responds to these risks and uncertainties.

The New Economic Growth and Job Creation Plan would include the following:

1) A realistic assessment of the international economic environment and what it means for the Canadian economy. The recent private sector “average” forecast should be discarded as a basis for budget planning. The Department of Finance should prepare a realistic economic forecast that allows for the impact of downside risks on the Canadian economy.

2) A commitment to a medium-term fiscal anchor that ensures a declining debt burden for future generations. The current commitment to eliminate the deficit in 2014-15 would be discarded. It is neither realistic nor necessary to eliminate the deficit in 2014-15. Eliminating the deficit two or three years later would be more realistic and acceptable in the current economic environment. What matters is that there be a credible fiscal plan that is realistic, responsible, transparent and prudent that will achieve that goal.

3) A commitment to continue to find the expenditure savings announced in both the 2010 and June 2011 budgets. A realistic plan for expenditure savings is critical for credibility.

4) A commitment to reallocate these savings from the program expenditure reviews to new initiatives to support research, investment, innovation and infrastructure in a federal-provincial partnership. This is essential to strengthen productivity growth and job creation.

5) A commitment to begin the difficult but necessary process of tax simplification and reform to support efficiency, economic growth and job creation. The government would commit to use the savings (which would be substantial) to lower both personal and corporate income taxes, thereby supporting economic growth and job creation.

6) A commitment to quickly reach an agreement with the provinces on the economic and fiscal consequences of the ageing of the population and how the current transfer agreements (which are to expire at the end of 2013-14) will be restructured to meet these challenges; and finally,

7) The inclusion of a cumulative short-term “reserve” of $20 billion in the budget for the two years 2012-13 and 2013-14 to offset a possible  worse economic outcome than is planned for.  If the reserve is needed it would be used to modernize infrastructure. If the reserve is not needed, it would to be used to pay down debt.

This plan would be realistic in its assessment of the economic and fiscal prospects. It would be responsible in the policy actions to support growth while committing to controlling the growth of debt. It would be prudent in allowing for risks and transparent in its openness. In short it would be a credible budget plan

This is an opportunity for the government to show real leadership when other countries are failing.