Harper Enters 2015 Vote With C$45 Billion Canada Surplus

Canada’s budget projects almost C$45 billion ($41 billion) in surpluses over four years, giving Prime Minister Stephen Harper a war chest for increased spending and tax cuts ahead of next year’s election campaign.

Finance Minister Jim Flaherty’s budget plan released yesterday forecasts a deficit of C$2.9 billion for the fiscal year starting April 1, the last of seven straight deficits before Canada swings to a C$6.4 billion surplus in 2015.

Harper and Flaherty have made balancing the budget a key part of preparations before the October 2015 vote, touting it as a symbol of Canada’s strength relative to other Group of Seven countries and fulfilling a pledge from elections three years ago. Harper, 55, now has fiscal room for politically attractive budget measures before the vote.

“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.

The budget projects surpluses of almost C$33 billion in the four years beginning in 2015. With a C$3 billion annual spending cushion, that gives as much as C$45 billion in fiscal room from 2015 to 2018.

Faced with weaker-than-expected revenue, Flaherty is ramping up efforts to keep the country on a path to surplus by raising taxes on tobacco and reducing benefits to retired government workers. Cigarette duties will raise C$3.3 billion over six years, and closing tax loopholes provides another C$1.8 billion, according to the budget.

Government Spending

Flaherty also added to his suite of spending cuts yesterday, 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.

Balancing the budget “was essential to the prime minister keeping his promises from the last election, and being able to craft an aggressive platform for the October 2015 election campaign,” said Geoff Norquay, a former Harper spokesman who now works at Earnscliffe Strategy Group, an Ottawa-based government-relations company.

The budget’s projected surpluses are wider than forecast as recently as November. They 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 set the stage for a political battle over how to use the windfall.

Debt, Taxes

At a public appearance today in Ottawa, Flaherty said he would prefer the government eventually use the fiscal room to pay down debt and cut taxes. Flaherty also said he doesn’t think income splitting is a good idea, even though he is just “one voice” in the party on the issue.

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

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

The government has faced criticism that concentrating on balancing the budget in the face of weaker job and revenue outlooks may be undermining growth, and the timing of the surpluses is politically motivated.

Opposition Criticism

“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.

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 said. “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.”

Canada’s economy created 99,000 net new jobs jobs in 2013, the smallest gain outside of a recession year since 2001.

Canadian consumer confidence fell last week to the lowest since May, as the worst-performing currency in the Group of 10 this year chips away at the perception Canada’s economy is robust, according to the Bloomberg Nanos Canadian Confidence Index.

Slowing Growth

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.

Canada’s finance department uses forecasts from private sector economists to generate its economic outlook. Slower-than-expected growth since November has reduced projected revenue by C$1.3 billion in the current fiscal year and C$1.7 billion in the fiscal year that begins in April.

Growth may be even slower than projected by the government, reducing revenue further, said David Madani, an economist at Capital Economics, in a research note.

“With the economy likely to underperform the consensus view over this period, the government will need every bit of this fiscal room and more to help bolster an otherwise sagging economy,” Madani said.

The budget includes some growth measures, including 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 carmakers 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.

Infrastructure Spending

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 existing bridges that link 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.

“We need institutions that are globally competitive and this gives universities extra resources,” said Paul Davidson, president of the Association of Universities and Colleges of Canada, in an interview. “We’re reaching the podium. This will help us get there.”

Consumer Agenda

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.

The budget focus yesterday was on spending restraint as Flaherty seeks to safeguard Canada’s status as the only Group of Seven country with a stable AAA credit rating. Moody’s Investors Service said yesterday the budget is consistent with maintaining that top rating.

The budget includes a table that outlines C$117 billion worth of cost-saving 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.

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

(Updates with Flaherty comments in 10th paragraph)
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