Bloomberg News

Flaherty Delays Canada’s Return to Fiscal Balance to 2015

November 09, 2011

(Updates with analyst comment in 11th paragraph.)

Nov. 8 (Bloomberg) -- Canadian Finance Minister Jim Flaherty said he will delay plans to balance the country’s budgets by one year, and implement new stimulus measures to help bolster a slowing recovery.

Flaherty, 61, released a budget update that projects a return to surplus by the fiscal plan that begins in April 2015, one year later than forecast in his June budget, in large part because of more conservative revenue assumptions. Cumulative deficits between 2011 and 2016 are now projected to be C$29 billion ($28.7 billion) more than budgeted in June.

The report comes amid a dimming outlook for growth as Europe’s debt crisis threatens to tip the global economy into recession. Prime Minister Stephen Harper said last week problems in Europe have begun to impact the country’s growth outlook, citing a 54,000 drop in employment during October.

“Let me be clear,” Flaherty said in a speech to the Calgary Chamber of Commerce, according to a prepared copy of the comments. “We will not be bound by ideology when it comes to make decisions to keep our economy strong.”

Canada will scale back planned payroll tax increases at a cost of C$600 million in the next fiscal year, and extend a work sharing program, Flaherty said today. The government also renewed the central bank’s 2 percent inflation target, highlighting its “flexible approach.”

The country’s employers have added a net 8,520 jobs over the past four months, even as data show the economy may have grown at a quarterly rate of more than 2.5 percent in the third quarter.

‘Lack of Confidence’

“It’s a reflection of the lack of confidence that has been spreading in world markets as a consequence of the European debt crisis,” Harper told reporters Nov. 4 in Cannes, France, where he attended a meeting of leaders from Group of 20 countries. “This is not by any way unique to Canada.”

Central bank governor Mark Carney has said economic recovery from the global financial crisis will take longer than from past recessions, and that the policy interest rate -- currently 1 percent -- may not return to normal levels even when the country’s has returned to operating at full capacity.

The Bank of Canada last month cut its forecasts for economic growth through the middle of 2012 as the U.S. and European economies falter, predicting the annualized pace of expansion in the world’s 10th largest economy will average 1.8 percent in the four quarters through June, compared with a previous estimate of 2.8 percent.

Higher Debt

Today’s update projects the country’s debt to increase to C$640.6 billion through the 2015-16 fiscal year, up from a June projection of C$610 billion. The figures don’t include savings from a government spending review.

“It’s not material really in the grander scheme of things in terms of what it means for markets or whether the additional annual issuance would have any impact,” said Mark Chandler, head of Canada fixed-income strategy at RBC Capital Markets in Toronto.

The update says employment insurance premiums will rise by 5 cents per C$100 of earnings next year, less than the 10-cent increase budgeted in June. The government will also extend a work-sharing program to 2012.

Flaherty’s governing Conservatives promised to accelerate Canada’s return to surplus during the campaign for May 2 elections that returned Prime Minister Stephen Harper to power with his first parliamentary majority. They pledged to implement new income tax cuts for families once the country returned to surplus.

Lower Revenue

The government’s revenue today was adjusted downward by about C$53 billion between 2011 and 2016 to account for slowing growth and increased global economic risk.

Excluding savings from a planned government spending review, the fiscal update projects deficits of C$31 billion in 2011-12, C$27.4 billion in 2012-13, C$17 billion in 2013-14, C$7.5 billion in 2014-15, C$3.4 billion in 2015-26, and a surplus of C$0.5 billion in 2016-17.

Including savings from the review, the update projects the deficit will shrink to C$26.4 billion in 2012-13, C$15 billion in 2013-14, and C$3.5 billion in 2014-15, before swinging to surpluses of C$0.6 billion in 2015-16 and C$4.5 billion in 2016-17. In both cases, the difference in cumulative deficits is about C$29 billion.

The government should make further investments in infrastructure to create jobs, rather than going ahead with planned cuts in the corporate income tax rate, said Peter Julian, a lawmaker for the New Democratic Party, the biggest opposition party in the country’s House of Commons.

“There’s certainly no indication that this government is taking off its rose-colored glasses,” Julian, the party’s finance spokesman, said in an interview with CBC News. “The government needs to act and it needs to make investments now to create jobs.”

--With assistance from Greg Quinn and Andrew Mayeda in Ottawa. Editors: Paul Badertscher, Gail DeGeorge

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

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


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