January 23, 2009 / 4:20 PM / 9 years ago

Federal budget to detail big stimulus plan

OTTAWA (Reuters) - Canada's fiscally conservative government is poised to set aside its ideals by introducing a massive stimulus package in its budget next week, ending more than a decade of budget surpluses.

Bowing to the ill economic winds that have forced other advanced economies into concerted action to stave off economic and financial calamity, Conservative Prime Minister Stephen Harper is under intense and conflicting pressures to produce a spending plan that lifts the economy out of recession and upholds Canada's track record as a relatively debt-free nation.

With its political survival also at stake, the government took the controversial step on Thursday of saying the government would run a C$60 billion ($48 billion) deficit over the next two years, even as the nation's central bank forecast this recession would be extraordinarily deep, but that the economy would rebound swiftly.

"Canadians no longer see the government as a passive player but are calling on the government to actively intervene in the economy and not just sit on the sidelines," said David MacDonald, analyst at the Canadian Centrefor Policy Alternatives, a think tank.

Harper, who as recently as October scoffed at the idea of deficit spending, is now prepared to commit up to C$30 billion on emergency actions next year to bolster the economy against the worst global financial crisis in 80 years. The plan will focus on fast-tracking infrastructure projects but will also include tax cuts, help for the unemployed and loan guarantees for banks, officials and sources have said.

Even without those measures, economists think the government could run a deficit of at least C$10 billion in 2009-10, compared with the surplus of C$13 billion Harper's Conservatives inherited when they took office in 2006.

An aide to Harper said on Thursday the deficit would be C$34 billion next fiscal year and C$30 billion the following year, the bulk of which would be comprised by the stimulus package. In the current fiscal year ending in March, Ottawa may post a small surplus although that is no longer a certainty. Canada last posted a deficit in 1996-97.

If the winds are in its favor, Ottawa may be able to balance its books again in five years, analysts said. But the easy surpluses of the past are over, they said.

"The last number of years we've been living high on the hog as these very high commodity prices have had a huge impact on revenues at all levels," said Pedro Antunes, economist at the Conference Board of Canada. "We don't see us getting back to where we were," he said.

DREADED "D" WORD

Canada still comes out ahead of other major economies, with the lowest debt burden in the Group of Seven countries at about 29 percent. That ratio may rise to as high as 35 percent after the stimulus, but that is still comparatively low.

Still, the unpopularity of the "D", for deficit, word in a country that takes great pride in having painstakingly eliminated deficits in the 1990s is not lost on Finance Minister Jim Flaherty, who has promised his budget will be "conservative" and contain a plan for balancing the books again.

The biggest question on many people's minds is just how much of the package will be comprised of tax cuts as opposed to building roads and bridges.

Tax cuts are considered by some as having less punch than infrastructure spending because consumers often use the extra cash to pay down debt and save rather than spend. Some studies show infrastructure creates twice as many jobs as tax cuts and has a bigger impact on economic growth.

"If the federal government is serious about buffering Canadians against the worst of this recession, it shouldn't be looking toward tax cuts. It should abandon those ideological precepts," MacDonald said.

Permanent tax cuts can create a permanent hole in government finances, making it harder to return to surplus. "It does tend to be more difficult to reverse later on and can lead to lower government revenues," said Carolyn Kwan, senior economist at Merrill Lynch.

"Being able to balance the budget will depend very much on the mix of stimulus that the government introduces," she said.

Liberal opposition leader Michael Ignatieff, who has the power to keep Harper's minority government in power or topple it, wants any tax measures to be targeted at low-income earners. But Harper has said the middle class must also be beneficiaries of the plan because they are the backbone of the economy.

But a showdown between the two may be unlikely as the political rhetoric has cooled after a united opposition came close to unseating Harper late last year.

($1=$1.25 Canadian)

Editing by Peter Galloway

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