Flaherty Says Canada to Put Tax Cuts Ahead of Lower Debt

Canada will emphasize tax reductions for families ahead of both lowering its debt burden and boosting spending, Finance Minister Jim Flaherty said.

Speaking in a Bloomberg interview in Melbourne where he’s attending a meeting of business leaders from Australia and Canada, Flaherty said the government’s top priority will be to lower taxes once the country moves to a surplus position starting next year.

“The No. 1 priority, because it’s in our platform, is reducing taxes on families,” Flaherty said. “After that, a decision can be made about, depending on how large the surplus is, reducing public debt.”

Flaherty’s budget released this month projects almost C$45 billion ($41 billion) in surpluses over four years starting in 2015, giving Prime Minister Stephen Harper a war chest ahead of next year’s election campaign. Harper and Flaherty have made balancing the budget a key part of preparations before the vote scheduled for October 2015, touting it as a symbol of Canada’s relative strength.

Flaherty didn’t elaborate on precise tax measures he’s considering. “Our overall commitment is to reduce taxes for families when we’re in surplus, which we will be next year,” he said. “There are various ways of doing that.”

Income Splitting

Earlier this month, Flaherty told a business audience in Ottawa he doesn’t like the idea of income-splitting -- a policy that allows families to divide income to lower their tax burden -- even though it was a key plank of his Conservative Party’s agenda during the 2011 election campaign.

“It benefits some parts of the Canadian population a lot and other parts of the Canadian population virtually not at all,” he said Feb. 12.

Justin Trudeau, leader of the opposition Liberal Party, said in a speech last week that backtracking on the income splitting pledge shows the government has become unprincipled.

“We’ve stuck to our principles, especially in the last five years when we had to deal with a large deficit arising out of the recession,” said Flaherty.

Flaherty hasn’t decided whether he’ll run in the 2015 elections, he told Reuters in a separate interview.

Resisting Spending

Flaherty made it clear today he intends to resist calls, whether from opposition lawmakers or his own party, to implement large spending programs.

“There will always be demands for new spending, it’s insatiable,” he said. “There aren’t going to be any grand plans that cost a fortune, which is how Canada got into trouble in the 1970s and 1980s.”

Earlier today, Flaherty told the Australia-Canada economic leadership forum that finance chiefs need to develop plans for budget repair and then “stick with the plan, and that’s not always easy in political life.”

“We have colleagues, and they all agree on fiscal prudence, except for their own ridings,” Flaherty said.

In terms of debt reduction, Flaherty said that’s a priority for future years. “I would like to see a medium- to long-term plan to reduce the public debt and the prime minister is committed to reducing the debt-to-GDP ratio to 25 percent over time.”

Roubini Remarks

Canada’s ratio of debt to gross domestic product was 33 percent in the fiscal year than ends March 31, narrowing to 27 percent in the 2017-18 fiscal year, according to estimates contained in budget documents this month.

Flaherty declined to comment on remarks by Nouriel Roubini, who advised Canada to use more aggressive monetary policy to weaken the Canadian dollar and support the economy.

“I deal with fiscal policy, I don’t deal with monetary policy,” he said.

He also said that it’s important for the Canadian economy that TransCanada Corp. (TRP)’s Keystone XL pipeline proceed. Canada has been waiting for the U.S. administration to make a final ruling on the $5.4 billion project, and President Barack Obama has said he won’t approve it if it significantly worsens carbon pollution.

The administration’s decision on Keystone will be made within “a couple” of months, Oklahoma Governor Mary Fallin, a Republican, told reporters yesterday, citing Obama following a meeting with governors.

Keystone XL

“In the short term, it’s quite important because we’re selling our oil more cheaply than other countries because of the difficulty of exporting it,” he said. “We need to have options in Canada, and not be dependent on one country deciding whether we get to export our oil or not.”

Flaherty came to Melbourne following a meeting with his counterparts from the Group of 20 countries in Sydney. He said he wasn’t concerned that the world’s most important economies were emphasizing growth at the expense of prudent fiscal policies.

“We stuck to the points that were being discussed about economic growth,” Flaherty told the business audience. “There’s always a tendency at these meetings to go off into other subjects.”

He added that turmoil in emerging-market financial markets, driven by the Federal Reserve paring back its stimulus program, was a predictable consequence of the Fed’s asset buying, known as quantitative easing.

Currencies Beaten

“The emerging economies are having their currencies beaten up by tapering,” he said. “I was never a fan of the approach the Fed took and Ben Bernanke and I have had lots of discussions. I think that there’s a risk and now we’re seeing the consequences.”

“I’d like to see the Americans have a medium-term plan for balance, to get back to surplus, and to start paying down their large public debt,” he said in the interview.

Flaherty appeared at the forum with Australian Treasurer Joe Hockey, who joked about how his surname is received in Canada.

“I’m actually very popular in Canada,” Hockey said. “In fact, I understand they built a hall of fame to me.”

To contact the reporter on this story: Paul Badertscher in Merlbourne at pbadertscher@bloomberg.net

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

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