Bloomberg News

Flaherty Budget to Show How Canada Will Finance Election Vows

June 06, 2011

June 6 (Bloomberg) -- Canadian Finance Minister Jim Flaherty, whose Conservative Party won a majority in last month’s election, will commit today in his 2011 budget to erase the country’s deficit during the government’s mandate while fulfilling campaign promises.

Flaherty has said he will issue a fiscal plan that will make only “modest” changes to the one presented on March 22, which didn’t pass Parliament before the election. The document will be released at about 4 p.m. New York time.

Prime Minister Stephen Harper’s May 2 election victory gave him what he says is a mandate to bolster the economic recovery with additional tax cuts and erase the deficit through curbs on government spending. Harper, who has governed since 2006 without control of the legislature, pledged last week to eliminate the deficit in 2014, one year earlier than planned.

“We must eliminate the deficit and return to balanced budgets to ensure that our economy can continue to grow and create jobs,” Harper said June 3 in a Speech from the Throne, the ceremonial opening of a new legislative session in Ottawa. “Our government’s plan will put us on a strong footing to resume paying down the federal debt, further reduce taxes on families and continue investing in priorities.”

Canada posted 3.9 percent annualized economic growth in the first quarter, second only to Germany among Group of Seven nations and more than twice the U.S. rate. Still, the Bank of Canada predicted in April economic growth would slow in the second quarter to about half the first-quarter pace. The faltering U.S. recovery has damped the ability of Canada -- the only net commodity exporter in the G-7 -- to benefit from rising prices, Bank of Canada Governor Mark Carney said May 16, as higher costs crimp U.S. growth.

Worst Performing Currency

Canada’s dollar has fallen against all 16 of the most- traded currencies over the past three months, according to Bloomberg data, dropping 12.3 percent against the Swiss franc and 5.4 percent against the euro, amid concern a weak U.S. recovery will prompt Carney to delay interest rate increases. Canada sends about 75 percent of its exports to the U.S.

While the government’s March fiscal plan projected a surplus by 2015, Harper promised during the campaign to accelerate that timetable by finding C$4 billion in annual savings in government spending.

The government will undertake a review of spending “in order to accelerate the return to a balanced budget and to eliminate the deficit one year earlier,” Harper said in the throne speech.

Spending Promises

The budget will also account for spending promises made during the election campaign, including C$2.2 billion to compensate Quebec for merging its provincial sales tax with the federal levy. As well, it will contain C$400 million for a program that benefits homeowners who carry out energy-saving improvements, increases in an income supplement for low-income seniors and tax breaks to encourage more doctors to work in remote areas.

The plan will include tax breaks for people taking care of infirm dependent relatives, the throne speech said, similar to a proposal that had been made by the main opposition Liberal Party.

Flaherty’s March budget also included a two-year extension of an accelerated capital cost allowance estimated to cost C$620 million, and an extension by one year of a 15 percent tax credit for mineral exploration.

Corporate Tax Cuts

Canada’s fiscal plan will also move ahead with planned corporate income tax cuts, Flaherty has said. Canada reduced the federal rate by 1.5 percentage points to 16.5 percent on Jan. 1, and it will fall to 15 percent in 2012 under legislation passed in 2007. Royal Bank of Canada, Barrick Gold Corp. and Suncor Energy Inc. -- the country’s three biggest taxpayers over the past 12 months -- will be among the beneficiaries.

Flaherty, who has presented all six of Harper’s budgets, will get an opportunity to introduce for the first time a fiscal plan that won’t also require support from opposition lawmakers to pass. Under Flaherty, program expenditures have increased by 40 percent to C$245 billion as he sought to placate opposition parties and win favor with voters.

A majority government may also make it easier to press ahead with free-trade agreements, and open industries to foreign investment to sustain spending by businesses that is driving growth.

In his throne speech, Harper pledged to “welcome” foreign investment and seek to complete free-trade agreements with the European Union and India.

Canada’s government now has “the consensus through a majority in order to put these structural medium and long-term policies together,” Jose Angel Gurria, secretary-general of the Organization for Economic Cooperation and Development, said in a June 3 Bloomberg interview in Ottawa.

--With assistance from Andrew Mayeda in Ottawa. Editors: Paul Badertscher, Sylvia Wier

To contact the reporter on this story: Theophilos Argitis in Ottawa at targitis@bloomberg.net

To contact the editor responsible for this story: David Scanlan at dscanlan@bloomberg.net


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