Back in black in six years

March 05, 2010

But it hinges on economic growth and keeping a firm hand on spending

Canada's budget will be back in the black, but just not any time soon.
It will take six years of favourable economic growth, a tight hand on the government's purse -- and some luck -- before the red ink disappears from the government's bottom line.

Finance Minister Jim Flaherty is banking on rising government revenues and restraint on spending in the military, international aid and government bureaucracy to trim the deficit to $49.2 billion in 2010-11, and then set it on a downward course where it is projected to reach $1.8 billion in 2015.
He said the budget will be balanced in 2015-16 but he stopped short of actually providing a surplus figure.
When asked why he wouldn't go that far, Flaherty said the plan was to look at the medium-term forecast, which he believes means five years, not six.
Flaherty provided a three-point plan to return the country to the promised fiscal land that includes wrapping up the $62-billion stimulus program and reining in spending on the military, international aid and government administration.
Flaherty said he will go after people who use loopholes in the tax laws to get tax credits for nose jobs and Botox injections and others who avoid paying taxes on employee stock options.

"This government will return to a balanced budget," Flaherty said before heading into the Commons to unveil his fiscal blueprint. "I don't like running deficits."
But the plan also relies heavily on several years of rosy economic growth -- growth that some economists fear may not be realistic.
Derek Holt, vice-president of Scotia Capital Investments, said the current-year forecasts may not be rosy enough but the two-, three- and four-year outlooks for both GDP growth and interest rates are likely more robust than they should be. Holt said that might mean the deficit numbers for 2012-13 and beyond may be $5 billion or $10 billion off the mark.

But he said compared with the rest of the world, that is still not a bad position to be in, noting most other developed countries would love to be as close to balanced budgets as Canada.

"We will still be the relative poster child on fiscal health," Holt said.
The minority Harper government would also appear to be in good political health, at least in the short term.
Liberal Leader Michael Ignatieff and the NDP's Jack Layton said they won't support the budget, but they also won't bring down the Tories over it.
"The key thing is that Canadians are saying to me... give us an alternative," Ignatieff said. "When Canadians can see a clear choice between cuts and freezes and gimmicks and alternatives that get this economy going... then maybe then we'll have an election."
There are no new major tax cuts, no new major spending initiatives and a number of plans to restrict the growth of spending on the military, international aid and government administration.

"This is probably the smallest budget in terms of new spending in 10 years," Flaherty said. "Most of the answers to requests for funding were 'no.' We've made some very difficult decisions."

That includes a decision to slow the rate of growth in spending on the military by $2.5 billion over three years starting in 2012-13, and to freeze the International Assistance Envelope after an eight per cent increase is incorporated this year.

Freezing the salaries of MPs, cabinet ministers and senators, as well as freezing the budgets of government departments, will save $6.8 billion. The Tories hope to trim $1.3 billion by identifying low-priority and low-performing programs.
The budget includes a sprinkling of targeted new spending that's mostly aimed at job growth and business innovation. There are no new cuts to personal income tax.

Elite athletes are getting $34 million to train and prepare for the Winter and Summer Olympics, $1 million will be spent to build community war memorials, and $6.6 million is going to allow EI sickness benefits to people who have lost a family member as a result of crime.
There are also some changes to allow parents with shared custody to share child tax benefits and single parents to keep more of their $100-per-month Universal Child Care Benefit for kids under six.

Flaherty agreed his fiscal forecast is less reliable over the long term, particularly as the global economic recovery is still fragile.
Flaherty said if the global economic recovery is not as robust as this budget projects, he will handle it.

"If the economy did not grow as anticipated by the private-sector economists, we could do more if we had to," he said
Craig Wright, chief economist at RBC, said he thinks Flaherty's plan is doable and he is glad it includes no tax increases and a focus on controlling spending.
"When you go forward and say 'how do we get to balanced budgets,' you would hope most of the heavy lifting would come from the spending side," Wright said.
Wright said the difficult decisions made in the 1990s that originally balanced the budget, and then nearly a decade of surplus budgets and debt repayment, put Canada in a better fiscal position to weather the storm.

He said it's true the figures are based on somewhat uncertain global growth rates, particularly in the United States, but he said overall he believes it is a "prudent plan."

Source:
Winnipeg Free Press
March 5, 2010