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Flaherty Increases Pre-Election Spending as Canada Narrows Budget Deficit

Canada’s Finance Minister Jim Flaherty pledged to use an improving fiscal outlook to speed deficit reduction while providing C$7.6 billion ($7.7 billion) in new spending and tax credits in a bid to win support from opposition lawmakers.

Flaherty released a five-year fiscal plan in Ottawa that projects a C$29.6 billion deficit in the fiscal year that begins April 1, down from C$40.5 billion in the current year and a record C$55.6 billion two years ago. A surplus is projected for the 2015-2016 fiscal year. The plan projects C$95.1 billion in cumulative deficits through March 2016, C$11.9 billion less than forecast last October.

“The idea is not to craft a package that suits Party A, Party B, Party C,” Flaherty told reporters ahead of delivering his budget in Ottawa today. “The idea is to craft a package that Canadians can support and that we can legitimately put before Parliament.” Canada’s accelerating economy is fueling revenue that allowed Flaherty to meet some demands for additional spending from opposition lawmakers whose support the governing Conservatives need to stay in power.

Michael Ignatieff, leader of the opposition Liberal Party, Gilles Duceppe, leader of the Bloc Quebecois, and Jack Layton of the New Democratic Party -- who together hold a majority of seats in the House of Commons -- all told reporters they won’t support the fiscal plan.

The government projects it will collect C$19.1 billion more in revenue through March 2016 than it projected in an October fiscal update, including the current fiscal year. Revenue is projected to grow an average 6 percent over the period.

Slow Spending Growth

Spending growth is forecast to slow even with the additional measures as the government benefits from efforts to reduce costs of government operations and eliminates tax loopholes, according to Flaherty’s plan.

A C$2.9 billion savings through March 2016 is expecting from closing a loophole that allows corporations with significant interests in partnerships to defer income into future years. Closing a loophole related to registered retirement saving plans will generate an additional C$500 million.

The total savings from cost cutting and elimination of loopholes will be C$6.2 billion over five years. Spending is projected to grow by an average 1.4 percent through 2016, down from an average increase of 8.9 percent between 2006 and 2010.

The budget also takes precautionary measures in case the global economic rebound falters. It uses growth projections lower than those provided by private sector economists, and calls for C$35 billion of borrowing beyond what’s needed over the next three years as a “safeguard” in case capital markets are disrupted.

Economists surveyed by the department have raised their 2011 growth forecasts to 2.8 percent from 2 percent in October. Nominal GDP is forecast to grow by 5.8 percent in 2011, up from an October forecast of 4.6 percent.

Meet Requests

The budget provides C$400 million for a program that benefits homeowners who carry out energy-saving improvements, increases an income supplement for low-income seniors, and seeks to encourage more doctors to work in remote areas by forgiving a portion of their student loans, seeking to meet requests by the opposition New Democratic Party.

The plan also includes a new C$2,000 tax credit for people taking care of infirm dependent relatives, similar to a proposal that has been made by the main opposition Liberal Party.

Recent data have shown Canada’s recovery is accelerating, even as inflation remains tame. The economy added jobs for a fifth straight month in February, and expanded at a 3.3 percent annualized pace in the fourth quarter, the fastest among the Group of Seven nations.

The government will initiate a one-year “strategic and operating” review of C$80 billion in program spending with the objective of generating at least C$4 billion in annual savings by 2014. Any potential savings from that review won’t be budgeted, leaving scope for the government to reduce its deficit further and return to surplus one year earlier, the plan said.

‘Close to Balance’

“The track is favorable, the projections are prudent, there is cushion for any bad news coming and that suggests we’ll probably get close to balance a little bit earlier than they are suggesting,” said Craig Wright, chief economist at Royal Bank of Canada. “The new initiatives were less than what we were worried that we would see.”

Additional measures in the budget include a two-year extension of an accelerated capital cost allowance poised to cost C$620 million, and the extension by one year of a 15 percent tax credit for mineral exploration. The fiscal plan will also eliminate special tax breaks for the oil sands sector that will generate C$220 million in revenue through March 2016.

Canada’s government will also extend by one-year a temporary domestic financing mandate of its export financing agency, Export Development Canada, and will review whether those powers should be extended further. EDC received its domestic lending mandate in 2009 as part of the country’s stimulus measures to offset the effects of the global recession.

Increasing the supplement for low-income earners will cost C$530 million through March 2013, while the caregiver tax credit will reduce revenue by C$200 million over that time, according to the budget. The government also is introducing a tax credit for families with children in arts classes, which will be worth C$225 million through March 2013.

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

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

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