The International Monetary Fund is declaring the worst global recession since the Second World War over, but warns that the recovery will be sluggish and hard choices — including higher taxes — will be necessary to sustain the economic rebound.

In an article published Wednesday, the international financing agency's chief economist says the recession has drained government treasuries to such an extent that "in nearly all countries ... higher taxation is inevitable."

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Finance Minister Jim Flaherty leaves the Conservative caucus meeting on Parliament Hill in Ottawa on June 10. Flaherty has taken heat for announcing Canada's deficit will balloon to $50.2 billion from $33.7 billion this fiscal year. ((Adrian Wyld/Canadian Press))

"The crisis has left deep scars," writes Olivier Blanchard, citing corporate bankruptcies, financial systems that have become partly dysfunctional, and the need for households in the United States to start saving again.

"All this means that we may not go back to the old growth path, that potential output may be lower than it was before the crisis."

The assessment echoes the Bank of Canada's latest outlook in July, when governor Mark Carney all but declared the recession in Canada over while also warning that the economy will emerge smaller and with a reduced output potential. 

Canada has had three quarters of economic shrinkage — two successive quarterly declines is a technical definition of recession — so expected growth in the current summer quarter means the recession is over. However, employment growth is expected to lag and further job cuts are expected for several more months.

The IMF's view that governments will have to raise taxes flies in the face of the public assurances of Prime Minister Stephen Harper and Finance Minister Jim Flaherty.

Both have insisted economic growth alone will be sufficient to eliminate the deficit over the next few years.

'Higher taxation is inevitable' —Olivier Blanchard, IMF

Toronto economic consultant Dale Orr agrees that Ottawa can avoid raising taxes, but says Canadians should be aware of what this means.

Orr and several other private-sector economists, including the parliamentary budget officer, have called Ottawa's deficit projections out of date and say the sudden deterioration of the economy since the budget was tabled in January means the government has no chance of meeting the 2013-14 target for balancing its books.

Recession will add $200B to debt: economist

Using consensus forecasts of future growth, Orr estimates the slowdown will add $200 billion to the country's national debt — double the Finance Department's current estimate — and that it will take another decade to eliminate the deficit.

"Somebody will have to pay," said Orr. "The question is who. It will be us after the economy is back on track in a couple of years, or it will be our children."

Flaherty is widely expected to move back his timetable for returning to a balanced budget when he tables his mid-year economic update this fall, as he already upped the deficit for this fiscal year to $50.2 billion from $33.7 billion.

But with the prospect of an election ever present in the current minority government environment, it is unlikely the Conservatives, or the opposition parties, will concede the necessity of raising taxes.

However, that may change in the future, says Orr, particularly if the United States, which is digging a far deeper fiscal hole, gives Ottawa cover by raising tax rates there.

The IMF cautions that while growth has begun in the world economy, signalling the technical end to the recession, the recovery with be sluggish by historical standards.

That's because U.S. consumers, who represents about 70 per cent of the economy, will take time to recover from years of spending beyond their means.

As well, the recovery will be held back by persistent high unemployment, which Blanchard says won't crest until some time next year.

Need for 'rebalancing'

In many countries, he says, the potential of the economy going forward will never return to the where it stood prior to the crisis.

A key criteria for sustainable growth going forward, even if at a relatively slow pace, is the need for "rebalancing" spending from the current government sector to private sector, since most governments are already tapped out.

And for the U.S. to become more of an exporting nation, rather than one that buys from abroad.

On the latter point, Blanchard says Asian countries, particularly China, can and should help.

"From the point of view of the United States, a decrease in China's current account surplus [the gap between exports and imports] would help increase demand, and sustain the U.S. recovery," he argues. "That would result in more U.S. imports, which would help sustain world recovery."

The IMF says such a rebalancing would also benefit China in meeting growing demand among from its population.