Harper Pressured to Scrap Corporate Tax Cuts as Canadian Lawmakers Return

Canadian Prime Minister Stephen Harper will be under pressure from opposition lawmakers to reverse corporate tax cuts and extend government stimulus as a condition for keeping his government in power when Parliament reconvenes today.

Lawmakers from the opposition Liberals and New Democratic Party have called on the government to scrap reductions in the corporate income tax rate that they say are unaffordable. They want more spending on programs to sustain the recovery.

Finance Minister Jim Flaherty has said he’ll present his next fiscal plan in March. The Conservative government holds a minority of seats in the House of Commons and needs support of one of three opposition parties to pass the budget. If the fiscal plan is defeated, elections would follow.

“If the Conservatives persist in their policy of across- the-board blind corporate tax reductions, it is highly unlikely the NDP caucus will vote for it,” Thomas Mulcair, deputy leader of the party, said in a telephone interview.

Canadian policy makers are dealing with the impact of a strong currency and a slowdown in spending by households and governments that are crimping the economic recovery and slowing job growth. The outlook has led Bank of Canada Governor Mark Carney to stop raising interest rates and Finance Minister Jim Flaherty to scale plans to exit stimulus.

Canada’s dollar has gained 6.6 percent against its U.S. counterpart over the past 12 months.

Growth Forecast

“Not only did their stimulus fail to create the jobs of tomorrow, it also failed to protect the jobs of today,” Scott Brison, the opposition Liberal Party’s spokesman for finance issues, said by telephone. “Investing in training and education now would do more to create jobs than corporate tax cuts.”

Canada’s economy will grow 2.4 percent this year, according to the median estimate of 19 economists surveyed by Bloomberg, down from 2.9 percent in 2010. Growth in the U.S. is projected to accelerate this year to 3.1 percent, from 2.9 percent in 2010.

Flaherty said last week his budget will aim for balance between reducing Canada’s budget deficit and sustaining economic growth. “You don’t want to kill a recovery that’s nascent,” Flaherty, 61, said in a Jan. 27 interview with Bloomberg Television in Davos, Switzerland, where he was attending the World Economic Forum’s annual meeting.

Record Deficit

Canada had a record C$55.6 billion ($55.6 billion) budget gap in the fiscal year that ended last March. The shortfall will narrow to C$45.4 billion in the current fiscal year, be cut in half in two years and disappear altogether in 2015, according to Flaherty’s prior fiscal plan, as temporary stimulus projects expire, the government implements cost controls and economic growth and higher payroll taxes boost revenue.

The deficit elimination schedule is an “achievable goal” Flaherty told reporters today in Vaughn, Ontario, north of Toronto. The government’s stimulus plan boosted economic growth by 1.3 percentage point per quarter starting in the second quarter of 2009, according to a report he released today.

The most contentious issue for opposition parties as Flaherty prepares this year’s budget is the reductions in corporate tax rates that are poised to cost the government more than C$6 billion in revenue next year, according to estimates by the Canadian Manufacturers and Exporters, a lobby group that supports the measures.

Canada cut the federal corporate income tax 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.

Country-wide Campaign

Harper’s government last week held a country-wide campaign aimed at pressing opposition lawmakers to support the 2011 budget. Nine ministers appeared at manufacturing sites across the country, saying the tax reductions will spur job creation and support economic growth. Opposition lawmakers say the government should cancel the cuts and use the funds to pay for health and education programs.

While ruling out a reversal in the tax cut plan, Flaherty has said he would consider funding for the forestry industry and worker training in the next budget as grounds for compromise with other parties. Dimitri Soudas, Harper’s director of communications, said today the governing Conservatives will listen to opposition parties, and won’t call an election or provoke the opposition parties into triggering one.

‘Make Parliament Work’

“The objective is to make parliament work,” Soudas told reporters today in Ottawa.

The Conservatives hold 143 of the 308 seats in the House of Commons while the Liberals have 77, the Bloc Quebecois 47, and the New Democrats 36. There are also 2 independents and 3 vacant seats. Harper has turned to all three at various points since taking power in 2006.

The Bloc Quebecois, the second-largest opposition party in Canada’s parliament, said Harper’s government will need to give the French-speaking province of Quebec C$5 billion in the next budget in order to win its support for the fiscal plan.

Statistics Canada revised its job-creation estimates on Jan. 28, erasing an earlier finding the economy recouped losses from the last recession. The revisions brought fresh calls from opposition lawmakers for Harper to rework his stimulus plan.

According to the revised figures, employment fell by 2.5 percent, or 427,900, from its peak in October 2008 to July 2009. Between July 2009 and December 2010, the economy created 398,000 jobs. The changes mean December employment levels were 0.6 percent below the previous estimate, Statistics Canada said.

“We’re in a jobs recession still in Canada and we’re pulling out of stimulus spending too fast,” the NDP’s Mulcair said.

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

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

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