Flaherty Faces Weaker Revenue in Restoring Canada Balance

Canadian Finance Minister Jim Flaherty will say in a budget today how he plans to cope with a weakening revenue outlook that is hampering efforts to eliminate the country’s deficit before the 2015 election.

Flaherty, who says this fiscal plan will focus on encouraging jobs and economic growth, is facing the slowest expansion since the 2009 recession, which may leave him short of next year’s deficit target by about C$800 million ($780 million) without additional cuts, according to a Bloomberg News survey of economists.

The longest-serving Conservative finance minister in a century is seeking to reverse a legacy of deficits that may reach about a combined C$170 billion, even as he searches for ways to encourage employment and investment.

“It’s trying to strike the balance between balancing the budget in the medium term and making sure there is economic growth,” Flaherty told reporters yesterday. “You will see that we try to create that balance.”

Economists surveyed by Bloomberg News this month forecast growth of 1.6 percent this year, compared with a 2 percent projection in Flaherty’s last fiscal update in November. The finance minister is due to deliver the budget to lawmakers at about 4 p.m. Ottawa time.

A 1 percentage-point reduction in growth for one year reduces revenue by C$3.9 billion in the first year and C$12.8 billion over three years, according to a formula provided by the finance department in that update, which projected a C$26.0 billion deficit in the fiscal year ending March 31, and a C$16.5 billion gap the following year.

Deficit Forecast

The deficit will probably be C$24.5 billion in the current fiscal year, and C$17.3 billion in the fiscal year starting April 1 without additional measures, according to the median estimate of eight economists surveyed by Bloomberg.

Complicating Flaherty’s balancing task is a C$2.4 billion increase in the nuclear liability of Atomic Energy of Canada Ltd., announced this week, which will show up on the government’s bottom line for the fiscal year ending March 31.

“From a macro standpoint, this is going to be very much a stay-the-course affair that might see a tiny bit of net tightening, but nothing significant,” said Doug Porter, chief economist at Bank of Montreal. “It might require a tiny bit of snugging.”

Flaherty, who has said he hasn’t decided whether to run for office in the next election scheduled for 2015, has pledged not to reduce transfers to individuals and provinces, or raise taxes other than closing loopholes, to spare most Canadians the brunt of deficit-cutting measures.

Operating Spending

Instead, he is zeroing in on the C$120 billion Canada’s government spends on operating and capital expenses, which represents less than half of his total program spending.

The governing Conservatives already have reduced the state payroll, pledging to fire about 12,000 workers and cut another 7,000 jobs through attrition. Today’s fiscal plans may include the findings of a newly formed cabinet committee, led by Treasury Board President Tony Clement, delegated to uncover additional savings.

In his November update, Flaherty projected direct program spending excluding payments to individuals and provinces would drop to 5.8 percent of GDP in 2015 from 6.7 percent in 2011. That will decline further to 5.4 percent by 2017, near the lowest in 50 years.

Lower deficits mean federal government bond issuance may shrink to the least since before the recession. Ian Pollick at RBC Capital Markets in Toronto is projecting sales of as low as C$85 billion in the new fiscal year, down from about C$95 billion in the current year.

‘Arbitrary’ Date

Peggy Nash, the spokeswoman for the main opposition New Democratic Party on budget issues, said the 2015 date for balancing the budget is “arbitrary” and the government doesn’t need to eliminate deficits that quickly.

Flaherty has also been seeking to promote growth with revenue-neutral measures, including regulatory changes to spur investment and reallocation of existing funds to areas such as job training and innovation.

In a letter to Conservative Party lawmakers March 18, Flaherty said his budget will focus on “jobs and the economy” by addressing infrastructure and job vacancies, following up on last year’s plan that promoted spending on energy projects. He’s also cited manufacturing as a sector of the economy that will receive additional help.

While total employment has increased by more than 950,000 jobs since July 2009, manufacturing jobs are still at almost the lowest on record as factories struggle with the Canadian dollar’s 45 percent gain over the past decade.

Dollar Impact

The higher dollar also has had a regional impact, with manufacturing-heavy Ontario posting above national average jobless rates in every month since 2006.

“Obviously, they are concerned about the persistent strength of the Canadian dollar,” Porter said.

In a Feb. 15 letter to Prime Minister Stephen Harper, the Canadian Manufacturing Coalition, an advocacy group, asked the government to extend a measure that allows manufacturers to accelerate write-offs from investments by five years. The measure, which the Globe and Mail reported today will be extended, was first introduced in 2007. The Globe and Mail report didn’t say where it obtained the information.

The group also advocated for the creation of a government fund to subsidize factories.

The National Post newspaper reported the government will also reduce tariffs on imported hockey equipment, without saying where it obtained the information.

Growth Shift

Much of Canada’s expansion over the next year depends on a shift from consumer spending, which has led growth for years, to business investment. Bank of Canada Governor Mark Carney said Feb. 25 the “rotation” of demand from the country’s indebted households to businesses “is the fundamental challenge” for the economy.

Recent evidence suggests companies are still holding back. Canadian investment spending will increase this year at the slowest pace since the 2009 recession, according to a Statistics Canada survey released Feb. 27, amid sluggish global demand and weak commodity prices.

The country’s energy producers are being hampered by a glut of supply that has constrained Canadian oil prices, in part because of a lack of transport routes.

The price of Western Canada Select, the benchmark heavy crude exported from Alberta to the U.S., reached a record discount below the price of U.S. West Texas Intermediate oil last year.

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