Canada Freezes Spending to Be First in G-7 to Erase Deficit
Canadian Prime Minister Stephen Harper’s five-year plan to cut defense spending, foreign aid and government operations won’t be rejected by opposition lawmakers, putting the country on course to be the first in the Group of Seven to erase its deficit.
Finance Minister Jim Flaherty, 60, released a C$281 billion ($273 billion) budget yesterday that forecasts the shortfall narrowing to C$49.2 billion in the 2010-11 fiscal year, down from a record C$53.8 billion last year. The gap will narrow to C$1.8 billion for the 2014 budget as stimulus measures expire, revenue recovers and spending cuts are implemented.
Michael Ignatieff, leader of the main opposition Liberals, said his party won’t seek to defeat the government on the plan, securing passage for Harper, who is 10 seats short of a majority in the House of Commons. The two other opposition parties won’t back the budget, saying it doesn’t do enough to create jobs.
“We’ve had three or four elections in the last few years and I got told very clearly by Canadians last autumn, don’t do that again,” Ignatieff told reporters in Ottawa. “When Canadians can see a clear choice between cuts and freezes and gimmicks and an alternative that gets this economy going, really meets the challenges of jobs and growth, then maybe then we’ll have an election.”
Harper, 50, and Flaherty are seeking to preserve the country’s record of frugality — 11 straight surpluses until the global recession hit — at a time when government spending is needed to drive growth.
Recession Victims
While yesterday’s budget sticks to a two-year, C$47 billion stimulus plan that keeps the deficit at near record levels this year, the governing Conservatives also outlined a path to bring the country back to balance by 2016.
“This is a budget that has completely left behind the victims of the recession,” New Democratic Party leader Jack Layton said. “It’s not a budget that we can support.”
Tax measures to close loopholes, and cuts to aid, defense and departmental operating budgets, will save C$17.6 billion over five years.
“I don’t like running deficits,” Flaherty told reporters yesterday in Ottawa. “We had to run this deficit temporarily because of the most serious economic crisis since the 1930’s.” Flaherty also resisted pressure to extend a popular home renovation tax credit, and to provide new tax breaks for investors and manufacturers.
‘Expenditure Restraint’
Canada’s aversion to debt was forged in the mid-1990s amid rating downgrades, a falling currency and a national unity crisis. Canada lost its coveted “Aaa” rating from Moody’s Investors Service Inc. in 1994 on concern the country would have trouble repaying its debt, which at the time was the second highest among G-7 countries after Italy. It took seven years to win the rating back.
Last year’s deficit eliminated all of Canada’s debt reduction accumulated since Harper came to power in 2006. Flaherty’s 2009 budget increased spending as a share of output by 2.6 percentage points, the biggest one-year increase since at least 1961, according to finance department data.
“I like the focus on expenditure restraint. I think it makes sense,” Avery Shenfeld, chief economist at CIBC World Markets, said in an interview.
In addition to the spending cuts, Harper also is betting the global economy will emerge from last year’s recession at a swift rate, helping Canada to grow at an average 2.9 percent in the next three years. The government bases its economic outlook on a survey of private-sector forecasters including economists from Royal Bank of Canada and Canadian Imperial Bank of Commerce.
Aggressive Assumptions
“The biggest surprise is the return to balance budgets within a five- to six-year time horizon,” said Derek Holt, an economist with Bank of Nova Scotia in Toronto. “That’s based upon some aggressive assumptions. It’s also assuming they will be successful in cutting program expenditures.”
Harper hopes to cut C$2.5 billion from planned defense spending, according to the budget plan, after the country withdraws its military from Afghanistan in 2011. The government will also cap spending on international assistance at 2010 levels, scaling back initial plans to grow its aid package by 8 percent. The move will save C$4.5 billion by 2015.
“This is probably the smallest budget in terms of new spending in 10 years,” Flaherty said.
Harper also pledged to freeze department spending, which includes payroll and procurement, saving the government C$6.8 billion. Measures to eliminate some federal programs and close tax loopholes will save an additional C$3.8 billion.
As part of the changes, the government will crack down on income trusts that convert into corporations and use “aggressive schemes” to claim tax losses. Ensuring tax deductions on employee stock options aren’t claimed twice — by the worker and the company — will save C$1.7 billion. Cosmetic surgery will also no longer be eligible for a medical-expense tax credit, a move the government values at C$200 million over five years.