Bloomberg News

Flaherty Says Operating Cost Cuts to Balance Canadian Budget

June 07, 2011

(Updates with 30-year bond yield in sixth paragraph.)

June 7 (Bloomberg) -- Canadian Finance Minister Jim Flaherty, whose Conservative Party won a majority in last month’s election, is counting on cuts in government operating costs and the elimination of tax loopholes to balance his budget within four years.

Flaherty yesterday said he will seek to bring the federal government back into surplus by 2014 by reviewing government operating costs to save up to C$4 billion ($4.1 billion) annually. The government also plans to generate C$4.1 billion in savings over the next five years by closing tax loopholes.

“The cornerstone of the budget,” Flaherty told lawmakers yesterday as he presented his 2011 fiscal plan, “is strong fiscal management.”

Flaherty and Prime Minister Stephen Harper have said they want to accelerate deficit cuts to secure the recovery and finance corporate tax cuts at a time of mounting concerns over sovereign debt risk. Canada’s improving fiscal outlook has boosted demand for its long-term government bonds relative to other Group of Seven peers, with yields on Canada’s 30-year securities 76 basis points less than similar U.S. bonds.

“In the private sector this would be viewed as not very ambitious,” Flaherty told reporters in Ottawa, referring to the planned spending cuts. He said the total amounts to 5 percent of the government’s C$80 billion in annual discretionary spending. “It’s challenging to do. Is it doable? It’s absolutely doable.”

Bond Yields

The 30-year yield on the Government of Canada bond fell to 3.45 percent on June 1, the lowest intraday level since Nov. 1, and down from as high as 3.88 percent in February, according to Bloomberg data. It was trading at 3.52 percent at 8:34 a.m. in Toronto trading. Similar-maturity U.S. Treasuries were trading at 4.27 percent.

Flaherty’s budget document released yesterday, which doesn’t account for the operating savings, projects a return to balance in the fiscal year starting April 2015.

Jack Layton, leader of the main opposition New Democratic Party, said the governing Conservatives are concealing the extent of cuts to Canadians. “Billions of dollars of cuts are being hidden away,” he said. Flaherty said the savings will be recorded in next year’s budget.

The budget, Flaherty’s sixth, is the first that won’t need support from opposition lawmakers to pass. Under Flaherty’s tenure, program spending has increased 40 percent to C$245 billion as he sought to placate opposition parties and win favor with voters.

Compensation for Quebec

Today’s fiscal plan has few changes to the one presented March 22, which wasn’t approved by Parliament before the election. It projects a deficit of C$36.2 billion for the fiscal year that ended in March, down from an initially projected C$40.5 billion, due to lower program spending.

The deficit for this fiscal year is forecast at C$32.3 billion, C$2.7 billion more than earlier projected. That includes C$2.2 billion to compensate Quebec for merging its provincial sales tax with the federal levy, a payment proposed by the government during the election campaign.

The budget projects a deficit of C$300 million for the 2014 fiscal year, and a surplus of C$4.2 billion for the 2015 fiscal year, both unchanged from the March fiscal plan. Including projected spending cuts, Canada would run surpluses of C$3.7 billion in 2014 and C$8.2 billion in 2015, according to the budget document.

The revised deficit projections led the government to adjust its debt-management strategy for the current fiscal year. Canada will cover its extra borrowing needs by issuing an additional C$5 billion of Treasury Bills, bringing the total to C$150 billion, the documents show. The federal debt is projected to be C$3.3 billion less in 2010-11, and $6.6 billion less over the six-year planning horizon.

‘Responsible Budget’

“It’s a very financially responsible budget,” said Albert Baker, head of tax policy, at Deloitte in Canada. “There is a plan in place to eliminate the deficit,” he said, adding the government needs to do more to reduce personal income taxes and provide incentives for innovation.

The government expects C$2.9 billion in savings through March 2016 from closing a loophole that allows corporations with significant interests in partnerships to defer income. Closing a loophole related to retirement-saving plans will generate an additional C$500 million.

Flaherty’s budget kept the same economic forecasts as March, projecting GDP growth of 2.9 percent in 2011 and 2.8 percent in 2012.

The budget said that while economic growth in the first quarter was faster than expected, recent indicators suggest the pace of expansion will slow in the second quarter. The document also said the focus of concern has shifted towards sovereign debt in Europe and away from oil price volatility and the impact of the Japanese earthquake and tsunami.

Second-fastest Growth

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 plan includes a two-year extension of an accelerated capital-cost allowance for manufacturers, and an extension by one year of a 15 percent tax credit for mineral exploration.

Canada’s fiscal plan also moves ahead with planned corporate income tax cuts. 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.

--With assistance from Greg Quinn in Ottawa. Editors: Paul Badertscher, John Simpson

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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