BMO warns against deficit cutting

The Bank of Montreal said Thursday governments should not lock themselves into deficit cutting, because the global economy is too fragile.

The bank also called, in its commentary, for Ottawa not to lock in to any hard deadline for ending its stimulus programs.

And the bank said that most industrialized nations should continue spending public money to support the recovery.

To support its arguments, the bank tried to dispel what it calls myths about spending, including that bond markets are worried about high borrowing by governments.

That would usually be indicated by high interest rates as lenders priced in the higher risk of default.

But BMO said most government bond markets are showing no such concern this year.

"Quite the contrary," said the report's author, and the Bank's deputy chief economist, Douglas Porter.

"Ten-year U.S. treasury yields have recently dropped to their lowest level since April 2009, when the economy was still mired in recession and losing more than 600,000 private sector jobs per month," he said.

Porter said another myth is that the U.S. has committed itself to massive stimulus. The truth, he said, is that spending cuts by state and local governments have negated much of the spending by Washington.

In Canada, the commentary said, the reverse has happened, with provinces adding to federal stimulus.

"The direct impact of government spending and investment has added 1.6 percentage points to GDP growth in [the 12 months ending in March], compared with a typical annual addition of just under 0.6 percentage points over the past 30 years," said Porter.

The commentary came a day after world financial markets fell amid concerns about the strength of the global recovery.