BUSINESSWEEK ONLINE : NOVEMBER 13, 2000 ISSUE
BUSINESS OUTLOOK Canada: How a Fiscal Boost Could Play Out Next Year In an attempt to enhance its political future, the government of Canadian Prime Minister Jean Chretien is preparing to boost the economy's prospects. On Oct. 18, Finance Minister Paul Martin modified the Liberal Party government's February budget proposal to include ''the largest tax cut in Canadian history.'' Then, on Oct. 23, Chretien called elections for Nov. 27. New tax measures for both households and businesses, including capital-gains relief and sizable cuts in the middle-income bracket, amount to C$100 billion ($66 billion) over five years. New spending programs will total C$50 billion ($33 billion). Both figures are nearly double the February proposals and would be paid for with expected budget surpluses. Economists estimate that the measures, which are front-loaded, will add a full percentage point to economic growth over the next year. Canadian growth has moderated, from a booming 5.8% pace in the second half of 1999 to 5% in the first half of 2000, and analysts now expect growth of about 4% in 2001. A potential problem is that the proposed fiscal boost will add strong stimulus to the economy almost immediately, at a time when growth is already powered by brawny domestic demand and an energy-related windfall from exports of pricier natural gas. The risk: an overheated economy that could force the Bank of Canada (BOC) to raise interest rates. Besides energy, inflation thus far remains tame. The September consumer price index rose 2.7% from the year before, and the core rate, excluding energy and food, was up only 1.3%, near the bottom of the BOC's 1%-to-3% target range. But with the jobless rate below 7%, labor markets are already tight. In September, growth in permanent-employee wages accelerated to a 4% rate per year, faster than productivity growth. The fiscal proposals could yield one key plus. Since the BOC is likely to keep policy tight, the Canadian dollar should be well supported, especially if economic expansion matches or exceeds U.S. growth. By JAMES C. COOPER & KATHLEEN MADIGAN _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS Canada: How a Fiscal Boost Could Play Out Next Year CHART: Inflation Is under Control INTERACT E-Mail to Business Week Online

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