Flaherty Cuts Spending to Move Closer to Budget Surplus

Canadian Finance Minister Jim Flaherty ramped up efforts to return the country to surplus in a budget that raises taxes on cigarettes and cuts benefits to retired government workers while providing more aid for carmakers.

Flaherty released a fiscal plan that projects a deficit of C$2.9 billion ($2.6 billion) for the fiscal year starting April 1, before the country swings to a surplus of C$6.4 billion in 2015. That includes a C$3 billion cushion in case growth fails to meet expectations, meaning the budget could be balanced in the coming fiscal year for the first time since 2007-08.

“Some people will say this budget is boring,” Flaherty told reporters today in Ottawa. “I consider that as a compliment.”

Flaherty said the move back to surplus puts the government in position to protect Canadians from a future economic shock like the 2008-09 financial crisis, while allowing Prime Minister Stephen Harper fiscal room for politically attractive budget measures ahead of a national election in 2015.

“It’s a pretty healthy war chest for tax relief, spending increases or some combination of the two,” said Craig Wright, chief economist at Royal Bank of Canada. (RY)

The government has also faced criticism that concentrating on balancing the budget in the face of weaker job and revenue outlooks may be undermining growth.

“They are trying to balance the budget in an election year on the backs of workers,” Justin Trudeau, leader of the opposition Liberal Party, told reporters following the budget’s release.

Gravy Train

New Democratic Party Leader Tom Mulcair, who heads the main opposition party, criticized the government for unfairly targeting public-sector workers.

“It’s the gravy train argument,” Mulcair. “The women and men who serve the Canadian public every single day and deliver the great services that we’ve given ourselves in this country are not to be attacked.”

The budget promises C$500 million to help keep auto investment in Canada, funds to facilitate speedier reviews of energy projects and legislation to combat higher costs in Canada for the same goods sold in the U.S. by multinational retailers.

Wider Surpluses

The budget’s projected surpluses are wider than forecast as recently as November and will allow the government to enact tax breaks that Harper promised during the 2011 federal election, including the ability of families to split their incomes for tax purposes, and sets the stage for a political battle over how to use the coming surpluses.

“It’s a placeholder budget with one eye firmly on the election next year,” said David Tulk, chief macro strategist at TD Securities Inc.

The budget projects surpluses of almost C$33 billion in the four years beginning in 2015. In a November fiscal update, the government had projected combined surpluses of about C$24 billion over that time. With the C$3 billion annual cushion, that gives as much as C$45 billion in fiscal room from 2015 to 2018.

Canada’s dollar was little changed after the report. The currency rose 0.4 percent, trading for C$1.1048 per U.S. dollar at 4:52 p.m. in Toronto. Yields on Canadian bonds rose to 2.45 percent from 2.41 percent yesterday.

The government revised down its estimates for nominal growth, which includes the impact of inflation and directly affects the government’s revenue base for both 2014 and 2015.

Lower Revenue

Economic developments since November have reduced projected revenue by C$1.3 billion in the current fiscal year and C$1.7 billion in the fiscal year that begins April.

Flaherty is seeking to safeguard Canada’s status as the only Group of Seven country with a stable AAA credit rating, which helps attract investors and keeps down interest costs for companies such as Bank of Nova Scotia, Royal Bank of Canada and BCE Inc. (BCE), among the country’s largest borrowers last year.

To offset a weaker revenue outlook and finance new measures, such as more funding for infrastructure projects and the automobile industry, Flaherty announced he will increase excise taxes on cigarettes, raising C$3.3 billion over six years. Closing tax loopholes will raise another C$1.8 billion.

Flaherty added to his suite of spending cuts today, pledging to reduce the amount the federal government contributes to a health-care plan for retired government employees, saving C$7.4 billion over six years. Canada’s government will also shift funding for major defense purchases into the future, adding to other measures taken to reduce government operating budgets.

Savings Measures

The budget includes a table that outlines how the government has introduced C$117 billion worth of savings measures since the 2010 budget through 2018.

Direct program spending, which excludes transfers to provincial governments and people, has been the focus of Flaherty’s cutting. The government expects such spending to decline 4.8 percent to C$113 billion in the fiscal year that starts April 1 and stay at similar levels next year.

As a share of GDP, direct program expenses are forecast to drop to 5.4 percent by 2017, the lowest since at least 1967, from 6.4 percent this year.

Total program spending is projected to decline in the 2014 fiscal year to C$250.2 billion from C$251.2 billion.

Even with a smaller than projected C$2.9 billion deficit for the coming fiscal year, Canadian bond issuance will increase 8 percent to C$95 billion, while T-bill sales will drop by C$22 billion to C$130 billion.

Innovation Fund

Today’s budget provides targeted funding for car manufacturing, bridge infrastructure and university research. Flaherty set aside an additional C$500 million for the Automotive Innovation Fund over two years aimed at encouraging car makers to expand facilities in the country, a bid to help revive a manufacturing sector that has been a drag on the economy since the end of 2011.

Canada will also spend C$497 million over two years to spur construction of a new bridge between Detroit and Windsor, Ontario, and will allocate C$165 million over two years to start building a new bridge in the Montreal area. An additional C$237 million will be used for repairs of the existing Champlain bridge that links Montreal to its southern suburbs.

For research, Canada’s government will create a C$1.5 billion fund over the next decade to help universities produce research in areas that “create long-term economic advantages” for the country, according to the budget.

The Canadian government also pledged to take steps to protect consumers by capping wireless roaming rates and said it would introduce legislation to reduce price differences between Canada and U.S. goods.

To contact the reporter on this story: Theophilos Argitis in Ottawa at targitis@bloomberg.net Andrew Mayeda in Ottawa at amayeda@bloomberg.net Cecile Gutscher in Ottawa at cgutscher@bloomberg.net

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

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