Canada vows balanced budget in 2015 without "slash and burn"

By Louise Egan

OTTAWA (Reuters) - Canada's Conservative government pledged on Thursday to close tax loopholes and curb spending to erase its budget deficit in time for the 2015 election, even as it committed funds to infrastructure, manufacturing and job training.

The projected deficit in the fiscal year ending March 31 is roughly in line with Ottawa's previous forecast in November, at C$25.9 billion ($25.4 billion). The deficit would be about 1.4 percent of the size of the economy, compared with about 5.6 percent for the U.S. deficit.

But a big hit to revenues as the economy slows has forced Ottawa to project a bigger-than-expected shortfall in 2013/14, at C$18.7 billion, or about 1 percent of gross domestic product, compared with a previous estimate of C$16.5 billion. The deficit will shrink to a third of that the following year before returning to a surplus of C$800 million in 2015/16.

Finance Minister Jim Flaherty said he could have cut spending more drastically but opted for "moderate choices" so he could stimulate growth and jobs.

"I want our country to be in a very solid fiscal position in case in the future we have another crisis," Flaherty told reporters.

"History tells us that crises - economic crises, credit crises - are inevitable from time to time. So the best thing we can do for Canada, it seems to me, is to make sure we have a solid foundation," he said. "We do not need to slash and burn, we can be sensible over time."

Moody's Investors Service confirmed Canada's triple-A bond rating after seeing the budget.

But the political opposition was not impressed, accusing Flaherty of shrinking government at the expense of growth, and of failing to deliver any new spending programs to help the unemployed.

"What we have here is an austerity budget ... You cannot austere your way out of a crisis," said Thomas Mulcair, leader of the main opposition New Democratic Party.

Bob Rae of the third-place Liberals called the budget document "an exercise in rhetoric and propaganda."

The government of Prime Minister Stephen Harper oversaw the country's slide into deep deficits at the height of the global financial crisis after an 11-year string of surpluses, most of them racked up by the previous Liberal administration.

It is now staking its reputation on balancing the books in time for an October 2015 election campaign, when it could offer new tax breaks it conditionally promised in the 2011 election.

WARNINGS ON AUSTERITY

The budget showed federal government revenues in the coming year would be C$3.4 billion lower than anticipated just four months ago, reflecting the weakest two quarters of economic growth since the 2008-09 recession and a steep discount on Western Canadian oil prices.

Bank economists saw the plan as feasible, but warned against more extreme austerity of the kind that hammered growth in the United Kingdom and elsewhere if the economy worsens.

"If the revenue side materializes as it is projected today, then we're fine ... Obviously, if we need another round of cuts in a year or two from now, that could be quite different. As we know in Europe, too much austerity can be quite damaging to an economy," said Sebastien Lavoie, assistant chief economist at Laurentian Bank Securities.

To offset the impact of lower revenues, Flaherty promised to decrease discretionary spending over the next five years to 5.5 percent of GDP from 6.7 percent and raise an additional C$6.8 billion in tax revenue without actually hiking tax rates.

At the same time, he managed to fund key priorities. The budget extends by two years a write-off of investments in machinery, as requested by the manufacturing sector.

It also provides C$47 billion for infrastructure projects over 10 years, but critics said that represented a cut in near-term funding with the big amounts postponed until 2020.

The budget even includes a populist measure designed to please a hockey-crazed country - reduced tariffs on hockey gear.

Flaherty also plans several regulatory measures targeting banks. These include curbing banks' use of government-backed mortgage insurance, imposing higher capital requirements on systemically important domestic banks and reviewing the regulatory framework to allow smaller banks to enter the domestic market.

Total spending restraint will save C$617 million over five years, which is negligible compared with spending cuts made in 2012.

FAVORABLE LIGHT

The bulk of the measures were on the revenue side, boosting federal intake by C$7.9 billion over five years. This will be done by tightening a myriad of tax loopholes and improving auditing by the Canada Revenue Agency.

Ottawa will also raise tariffs on imports from 72 developing nations like China, South Korea and Brazil, effectively ending their inclusion in Canada's General Preferential Tariff regime.

The ratio of debt to gross domestic product is set to decline to 28.1 percent in 2017/18 from 33.8 percent, which is the lowest in the Group of Seven advanced economies.

"For the most part, very little surprises from a market perspective. If anything, it's going to continue to show Canada in a pretty favorable light," said Derek Burleton, deputy chief economist at TD Bank.

Emboldened by the country's triple-A rating and popularity with foreign investors, the federal government is looking at offering a 40-year bond for the first time.

Flaherty stressed that jobs were his priority for the economy, a top concern of businesses that have complained they cannot find enough skilled workers, particularly in the resources sector in Western Canada.

The budget proposes renegotiating Ottawa's agreement with provincial governments on how to spend money for training by creating a job grant to better match unemployed workers to skills training, as well as support for apprenticeships.

There has been much speculation that Flaherty, who suffers from a rare skin condition, might step down after this budget.

Asked whether this was his last budget, Flaherty said he'd like to stay on until balancing the budget. "I'd like to finish what I started."

(Additional reporting by Randall Palmer, David Ljunggren and Alex Paterson; Editing by Jeffrey Hodgson and Dan Grebler)

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Canada vows balanced budget in 2015 without "slash and burn"

By Louise Egan

OTTAWA (Reuters) - Canada's Conservative government pledged on Thursday to close tax loopholes and curb spending to erase its budget deficit in time for the 2015 election, even as it committed funds to infrastructure, manufacturing and job training.

The projected deficit in the fiscal year ending March 31 is roughly in line with Ottawa's previous forecast in November, at C$25.9 billion ($25.4 billion). The deficit would be about 1.4 percent of the size of the economy, compared with about 5.6 percent for the U.S. deficit.

But a big hit to revenues as the economy slows has forced Ottawa to project a bigger-than-expected shortfall in 2013/14, at C$18.7 billion, or about 1 percent of gross domestic product, compared with a previous estimate of C$16.5 billion. The deficit will shrink to a third of that the following year before returning to a surplus of C$800 million in 2015/16.

Finance Minister Jim Flaherty said he could have cut spending more drastically but opted for "moderate choices" so he could stimulate growth and jobs.

"I want our country to be in a very solid fiscal position in case in the future we have another crisis," Flaherty told reporters.

"History tells us that crises - economic crises, credit crises - are inevitable from time to time. So the best thing we can do for Canada, it seems to me, is to make sure we have a solid foundation," he said. "We do not need to slash and burn, we can be sensible over time."

Moody's Investors Service confirmed Canada's triple-A bond rating after seeing the budget.

But the political opposition was not impressed, accusing Flaherty of shrinking government at the expense of growth, and of failing to deliver any new spending programs to help the unemployed.

"What we have here is an austerity budget ... You cannot austere your way out of a crisis," said Thomas Mulcair, leader of the main opposition New Democratic Party.

Bob Rae of the third-place Liberals called the budget document "an exercise in rhetoric and propaganda."

The government of Prime Minister Stephen Harper oversaw the country's slide into deep deficits at the height of the global financial crisis after an 11-year string of surpluses, most of them racked up by the previous Liberal administration.

It is now staking its reputation on balancing the books in time for an October 2015 election campaign, when it could offer new tax breaks it conditionally promised in the 2011 election.

WARNINGS ON AUSTERITY

The budget showed federal government revenues in the coming year would be C$3.4 billion lower than anticipated just four months ago, reflecting the weakest two quarters of economic growth since the 2008-09 recession and a steep discount on Western Canadian oil prices.

Bank economists saw the plan as feasible, but warned against more extreme austerity of the kind that hammered growth in the United Kingdom and elsewhere if the economy worsens.

"If the revenue side materializes as it is projected today, then we're fine ... Obviously, if we need another round of cuts in a year or two from now, that could be quite different. As we know in Europe, too much austerity can be quite damaging to an economy," said Sebastien Lavoie, assistant chief economist at Laurentian Bank Securities.

To offset the impact of lower revenues, Flaherty promised to decrease discretionary spending over the next five years to 5.5 percent of GDP from 6.7 percent and raise an additional C$6.8 billion in tax revenue without actually hiking tax rates.

At the same time, he managed to fund key priorities. The budget extends by two years a write-off of investments in machinery, as requested by the manufacturing sector.

It also provides C$47 billion for infrastructure projects over 10 years, but critics said that represented a cut in near-term funding with the big amounts postponed until 2020.

The budget even includes a populist measure designed to please a hockey-crazed country - reduced tariffs on hockey gear.

Flaherty also plans several regulatory measures targeting banks. These include curbing banks' use of government-backed mortgage insurance, imposing higher capital requirements on systemically important domestic banks and reviewing the regulatory framework to allow smaller banks to enter the domestic market.

Total spending restraint will save C$617 million over five years, which is negligible compared with spending cuts made in 2012.

FAVORABLE LIGHT

The bulk of the measures were on the revenue side, boosting federal intake by C$7.9 billion over five years. This will be done by tightening a myriad of tax loopholes and improving auditing by the Canada Revenue Agency.

Ottawa will also raise tariffs on imports from 72 developing nations like China, South Korea and Brazil, effectively ending their inclusion in Canada's General Preferential Tariff regime.

The ratio of debt to gross domestic product is set to decline to 28.1 percent in 2017/18 from 33.8 percent, which is the lowest in the Group of Seven advanced economies.

"For the most part, very little surprises from a market perspective. If anything, it's going to continue to show Canada in a pretty favorable light," said Derek Burleton, deputy chief economist at TD Bank.

Emboldened by the country's triple-A rating and popularity with foreign investors, the federal government is looking at offering a 40-year bond for the first time.

Flaherty stressed that jobs were his priority for the economy, a top concern of businesses that have complained they cannot find enough skilled workers, particularly in the resources sector in Western Canada.

The budget proposes renegotiating Ottawa's agreement with provincial governments on how to spend money for training by creating a job grant to better match unemployed workers to skills training, as well as support for apprenticeships.

There has been much speculation that Flaherty, who suffers from a rare skin condition, might step down after this budget.

Asked whether this was his last budget, Flaherty said he'd like to stay on until balancing the budget. "I'd like to finish what I started."

(Additional reporting by Randall Palmer, David Ljunggren and Alex Paterson; Editing by Jeffrey Hodgson and Dan Grebler)

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Analysis: Experts see risks from Canada's fixation on balanced budget

By Louise Egan

OTTAWA (Reuters) - The government's steely determination to balance Canada's budget by 2015 could brake an economy that is already showing signs of strain, as Ottawa seeks to rebuild a reputation for prudence that made it the envy of the industrialized world.

The 2013-14 federal budget, due later this month, is set to reinforce the government's message that the deficit will be eliminated by 2015, an election year, and it will include what Finance Minister Jim Flaherty called "more sacrifices" from various ministries in the form of spending cuts.

But not everyone agrees that the tough fiscal targets make economic sense, given that Canada just recorded the weakest two quarters of economic growth since the 2008-09 recession.

"I don't think there are any economists that are particularly concerned about the deficit at this point," said David Macdonald, a senior economist at the Canadian Centre for Policy Alternatives (CCPA), an Ottawa-based think tank.

The Parliamentary budget officer, which provides independent analysis of the nation's finances, estimates spending cuts will shave about 0.6 percent from GDP this year, 0.9 percent next year and 1 percent or more in 2015 and beyond.

"This is like the minister standing up and saying: 'my plan for the economy is to cut growth by a third.' That's something no minister would ever say but that's in fact what is happening," said Macdonald.

Canada, once dismissed as a high-debt basket case, spent years between 1994 and 1997 taming its federal budget deficit, and winning a global reputation as prudent fiscal managers with a top-tier rating.

But the Conservative government allowed the surplus to turn to deficit as the recession hit, adding big spending programs to previously announced tax cuts to stimulate the economy.

Ministers now say its time to turn that pattern round again.

"If you don't set targets like that based on your original processes, you'll never reach a target," Tony Clement, the minister who oversees departmental spending, said in an interview with Reuters on Monday.

Asked if the government was perhaps trying to balance the books too soon, he replied: "We've shown fiscal probity that is all too rare with advanced, industrialized economies, so I think we are the poster child in the G7 and the G20 ... that other countries would do well to emulate."

The renewed penny-pinching push comes as consumers have hit a debt wall, businesses are too scared to invest and exports have yet to recover their pre-crisis levels due to weak global demand. The Bank of Canada has made it clear it will not cut interest rates to stimulate the economy, leaving fiscal policy as the only other tool to boost growth.

Yet one business leader who has met several times with finance officials in pre-budget consultations said he was hearing that the minister won't bend on the 2015 target.

Flaherty has blamed a price discount on Canadian oil for a "significant" hit to federal revenues and said he would have to compensate by focusing "like a laser" on spending and closing some tax loopholes.

The main opposition party, the New Democrats, accuses Prime Minister Stephen Harper of trying to please his small-government, conservative base and make fiscal room to offer new goodies the next time they go to the polls in October 2015.

"Austerity can be a job killer and a growth killer," said NDP legislator Peggy Nash.

In the May 2011 election, Harper promised a tax cut for families with children by allowing the higher earner to split some of his or her income with a spouse, and a higher ceiling on tax-free savings accounts, costly measures that will take effect only after the budget is balanced.

Ottawa expects the 2012-13 federal budget deficit to be C$26 billion, or about 1.5 percent of gross domestic product, falling to C$13.5 billion in 2013-14.

That is trivial compared to the U.S. or U.K. deficits of about 5 and 7 percent of GDP, respectively, although Canada's numbers are less flattering when provincial government debt is included.

Even if the government increased spending substantially and ran a deficit next year twice the amount forecast, as proposed by Macdonald and his colleagues, the debt-to-GDP would decline to 31 percent in 2015-16 from the current 33 percent.

Canada would still have the best debt position in the Group of Seven advanced economies.

Chief economists from Canada's largest commercial banks said last week that bond markets and rating agencies don't mind if the fiscal gap is closed in 2015 or a couple of years later.

"Given the fact that a lot of the provinces are moving into pretty serious restraint, it would probably be unwise for the federal government to step on the brake further than they already have," said Doug Porter, chief economist at Bank of Montreal.

But even as the federal government pushes ahead with plans to cut spending, cities are hoping for extra cash for infrastructure like roads, bridges and public buildings, arguing that Ottawa should take advantage of current low interest rates.

"We've been very encouraged and are hopeful with regards to the outcomes on budget day," said Karen Leibovici, president of the Federation of Canadian Municipalities (FCM), which lobbies on behalf of cities.

The FCM is seeking an additional C$2.75 billion in infrastructure spending, which would bring it in line with investment seen in the 1980s and 1990s in percentage of GDP.

Flaherty says will be revealed on budget day, the date of which is likely to be announced in the coming days.

(Additional reporting by Euan Rocha and Janet Guttsman in Toronto; Editing by Diane Craft)

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