Flaherty Holds Spending to Return Canada to 2015 Balance

Canadian Finance Minister Jim Flaherty plans to eliminate the country’s deficit before the next election in 2015 by limiting spending growth to the slowest pace since the 1990s and banking on an accelerated recovery.

Flaherty’s budget presented today projected Canada will swing to a surplus of about C$800 million in the fiscal year that begins April 2015, from a C$25.9 billion deficit in the year ending this month. Spending growth is forecast to average 2.1 percent over the next five years, after rising about 26 percent, or 4.9 percent a year, since 2007. Revenue is projected to grow an average 4.6 percent, more than double the current year’s pace, as Flaherty bets the country’s expansion will pick up steam.

“It’s credible, in that growth in revenue and expenditures are very doable and realistic,” said Michael Gregory, senior economist at BMO Capital Markets in Toronto, even though the “net risk is that revenues don’t live up to projection.”

Flaherty is seeking to reverse a legacy of deficits that may reach a cumulative C$170 billion amid the slowest expansion since the 2009 recession that is hampering revenue. He’s betting recent efforts to restrain government spending will help the country keep its status as the sole Group of Seven nation with a stable top credit rating.

Capital Expenses

“It requires discipline, but that discipline is being followed and it leads to a balanced budget,” Flaherty, who has said he hasn’t decided whether to run for office in the next election, told reporters in Ottawa.

Canada is the only Group of Seven country with a stable AAA debt rating from Standard & Poor’s, Moody’s Investors Service and Fitch Ratings. Moody’s said in a statement today the budget is in line with the government’s Aaa bond rating.

Canada’s currency extended gains after the budget was released. It traded at C$1.0244 per U.S. dollar at 5:36 p.m. in Toronto. One Canadian dollar buys 97.62 U.S. cents.

Flaherty 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.

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

Reducing Payrolls

The governing Conservatives lead by Prime Minister Stephen Harper already have been working to reduce the state payroll, pledging to fire about 12,000 workers and cut another 7,000 jobs through attrition. Today’s fiscal plans include about C$600 million worth of additional savings from government over five years.

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 2012. That will decline further to 5.5 percent by 2017, near the lowest in 50 years.

Flaherty’s plan also projects spending will be less than forecast in his last update in November, reflecting changes to how the government accounts for budgeted expenses that never occur, and other factors such as weaker-than-expected inflation that is reducing price-indexed payments.

Revenue though is being hampered by a slumping global economy, with the government reducing its growth forecast for this year to 1.6 percent, compared with a 2 percent November projection. Combined with lower commodity prices, that will reduce revenue projections by C$14.8 billion between 2012 and 2017, before new measures in the fiscal plan.

‘Consistently Wrong’

“Stephen Harper and Jim Flaherty have consistently gotten it wrong with regard to their budget predictions,” Thomas Mulcair, leader of the opposition New Democratic Party told reporters in Ottawa. “The deficit was higher than had been predicted. Growth was lower. They’re making a very high prediction for next year to come up with their under-C$20 billion deficit prediction. That will of course also have proven to be wrong.”

One benefit from weakening global growth is lower borrowing costs, reducing interest expenses by more than C$2 billion over the next five years.

The government’s also eliminates tariffs on baby clothing, imported hockey equipment and other sports equipment, a measure that will cost C$76 million a year, budget documents show.

Revenue Measures

Today’s plan includes revenue raising measures that include closing of loopholes and steps to reduce tax evasion, in part to pay for new initiatives. Closing tax loopholes will generate another C$4.4 billion in revenue over five years, while the government expects to generate an additional C$2.4 billion from more aggressive efforts to catch tax evaders.

Flaherty also announced he will remove 72 “higher-income” countries, including South Korea and China, from Canada’s preferential tariff system, which allows goods from developing nations lower duty rates. The change will come into effect in 2015 and raise C$333 million annually.

Measures to bolster growth will cost C$6.9 billion from 2012 to 2017, including a two-year extension on a temporary tax break and new direct funding for manufacturers who have been hardest hit by the global slowdown.

While total employment has increased by more than 950,000 jobs since July 2009, manufacturing jobs are still at near 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 June 2006. Flaherty today announced new funding for a regional development agency in southern Ontario, and allocated C$1 billion for aerospace and military manufacturers.

“It addresses the issues that are critical for the companies that are adding value to reboot the economic recovery,” said Jay Myers, chief executive of Canadian Manufacturers and Exporters, an Ottawa-based advocacy group.

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.

Oil Glut

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.

Flaherty this year is reallocating existing funding to begin financing grants of C$15,000 for job training, to be jointly funded by provincial governments and employers.

The country’s job vacancy rates are the highest in Alberta, Saskatchewan and Manitoba, according to Statistics Canada data.

“The Canadian economy certainly slowed through the second half of last year, but is expected to gradually grind higher,” David Tulk, chief Canada macro strategist at TD Securities said in an interview in Ottawa. “The decisions made today are appropriate to reflect some of that uncertainty. The important thing to take away from this is recognizing that Canada does stand head and shoulders over many of its developed-market peers in ensuring that its fiscal fundamentals are very sound.”

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