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OTTAWA (Reuters) - The economy has slipped into recession and the federal coffers are on the verge of running dry for the first time in 13 years, the government said on Thursday in a report that raised the prospect of an early election.
Even so, the government forecast that the budget would show a tiny surplus in the next fiscal year, a surprise after it prepared the country for the possibility of renewed deficits.
In his annual economic and fiscal update, Finance Minister Jim Flaherty appeared to focus more on restraint and balancing budgets in the face of a global recession, bumping the idea of fiscal stimulus further down on the government's agenda.
Among the few measures aimed at softening the impact of the global market meltdown, Flaherty proposed expanded powers for the government to support banks hit by the crisis, including capital injections by the government, as well as some temporary relief for pensioners and private pension-fund providers.
The statement stunned opposition parties, which slammed Ottawa for failing to produce a plan to combat the crisis or to extend emergency aid to the auto sector. They also denounced what they called "ideological" moves such as plans to end some subsidies to political parties and to suspend the right to strike by public-sector employees.
"This is no way to govern when you're on the edge of Niagara Falls. So go back and think about it again," said Michael Ignatieff, a Liberal legislator.
If all three opposition parties reject the package in a vote scheduled for Monday, the government would be defeated only a few weeks after it was returned to power in an October 14 election.
None of the opposition parties has the money to fight an election now. That suggests they could also lean on Harper to amend the fiscal update or arrange for enough legislators to stay away from the vote so that the Conservatives would prevail.
Ignatieff, a contender for the leadership of the Liberals, said his party would cooperate if Prime Minister Stephen Harper came back with a better plan.
A senior member of the left-leaning New Democrats said that although all three opposition were against the plan, there were other options they could explore before an election was called -- a clear reference to a possible three-party coalition government.
Such a coalition would be highly unstable, since the third opposition movement is the separatist Bloc Quebecois, which wants to break Canada apart.
The political fury overshadowed the details in the statement. Contrary to expectations, the Conservative government said it would post a budget surplus in the 2008-09 fiscal year and the next five years as well. The surplus in the current year is seen at C$800 million, narrowing to C$100 million in the following two years.
Even those numbers could quickly become obsolete. Flaherty said he would add stimulus spending to the economy early in the new year if the global economy worsens.
The forecast was met with some skepticism by economists.
"I'd be a little surprised if at the end of the fiscal year we aren't in a deficit," said Todd Hirsch, senior economist at Alberta Treasury Branches.
"There's a fair amount of cutting that has to be done to get to their surplus estimate," said Mark Chandler, fixed income strategist at RBC Capital Markets.
The government sees the economy contracting 1 percent in the fourth quarter and 0.4 percent in the first quarter of next year before returning to growth. The popular definition of a recession is two consecutive quarters of contraction.
The growth outlook, based on private sector forecasts, pegs 2008 economic growth at 0.6 percent, down from a 1.1 percent estimate made in August. For next year, growth is pegged at 0.3 percent, down from a 2.4 percent prediction in the last budget in February.
To restrain spending, the government is reviewing all expenditures and considering the sale of assets but said it won't conduct a "fire sale" at bargain prices.
To the outrage of opposition parties, it said it would legislate public-sector employee wages, including a temporary suspension of the right to strike and revamping pay equity legislation.
On pension funds, it will reduce by 25 percent the amount seniors must withdraw from their Registered Retirement Income Funds for 2008, to minimize losses from low market prices.
The government also proposed to allow federally regulated private pension plans to extend their solvency funding payment schedules from five to 10 years.
Additional reporting by David Ljunggren and Randall Palmer; Editing by Frank McGurty