January 27, 2009 / 9:19 PM / 9 years ago

Canada pledges billions in tax cuts, spending

<p>Canada's Prime Minister Stephen Harper speaks during Question Period in the House of Commons on Parliament Hill in Ottawa, January 27, 2009.Chris Wattie</p>

OTTAWA (Reuters) - Canada's Conservative government unveiled a two-year C$40 billion ($32 billion) stimulus package on Tuesday to help pull the economy out of recession, laying out plans for a budget deficit for the first time after 11 straight years of surplus.

The budget is a do-or-die proposal for Prime Minister Stephen Harper's minority Conservative government, which will need the support of at least one of the three opposition parties to remain in power.

Two parties, the New Democrats and the Bloc Quebecois, immediately rejected the plan, but the more influential Liberals were widely expected to approve it, though they will not make an official announcement until Wednesday.

"There are some positive sides to this budget ... but there are some things that we are concerned about," said Liberal leader Michael Ignatieff

Ignatieff said his caucus members would discuss their next move at a meeting Tuesday evening, and would make a formal announcement at 11 a.m. on Wednesday. If they disapprove of the plan, they could either force a snap election or seek to govern as a coalition together with the other opposition parties.

"Is he underestimating the size of the crisis? And have they done enough for the unemployed? ... Those are two questions that are of concern to us. In terms of infrastructure, will they really be spending that money and spending it quickly?" Ignatieff said.

Of the total package, about a third was in the form of tax cuts aimed at low- and middle-income earners and C$12 billion was in infrastructure spending over two years.

A wide-ranging set of targeted loans, worker training programs and measures to bolster the financial system in the face of the global credit crisis completed the package. The stimulus is equivalent to 1.5 percent of gross domestic product this year.

Finance Minister Jim Flaherty vowed to limit the extraordinary spending to two years but kept the door open to future action if the economy deteriorates further.

"Things could get worse than we're anticipating, and if they get worse, we'll do more," he told reporters who had access to the budget under embargo.

The announcement had little effect on the Canadian dollar, which was virtually flat against the U.S. currency.

Analysts said the diverse measures in the budget were likely to win enough support in the House of Commons for it to survive.

"It's pretty broad. To see it turned down would be pretty difficult, especially in the context of further delays of when any measures get enacted," said Craig Wright, chief economist at Royal Bank of Canada.

"The recession is taking hold now so you'd like to see action now. My guess is that this will be begrudgingly supported," he said.

<p>Prime Minister Stephen Harper uses a nail gun while touring a home undergoing renovations in Ottawa, January 28, 2009.Chris Wattie</p>

Budget deficits -- almost a taboo in fiscally prudent Canada -- will total C$85 billion over five years, the government estimated. But it predicts the plan will boost the economy by 1.4 percent this year and create 190,000 jobs by 2011.

The spending plan pushes Canada into a surprise C$1.1 billion deficit in the current 2008-09 fiscal year, ending March 31. The projected deficit for 2009-10 is C$33.7 billion. Ottawa foresees a return to surplus in 2013-14.

Derek Burleton, senior economist at Toronto-Dominion Bank, said he expects most of the benefit from the stimulus plan to be felt in 2010.

"I think the bigger challenge is going to be maintaining, accelerating momentum in the final three years of the five-year plan," Burleton said.

Wright said much of Canada's recovery was out of Ottawa's hands.

"From our perspective, I don't think there's any false pretense that (the budget measures) are going to turn growth prospects around on their own. To a large degree, this wasn't a made-in-Canada recession so it's not going to be a made-in-Canada recovery."

USE IT OR LOSE IT

The tax cut plan envisages C$20 billion in personal income tax cuts over five years and C$1.9 billion in tax measures for businesses over the same period, from 2008-09 through 2013-14.

Some of the tax measures targeted low-income earners, which was a key demand of Liberal leader Ignatieff in the days leading up to the budget's release.

For businesses, the biggest tax item is a two-year extension of a temporary acceleration of capital cost allowance rates for companies investing in machinery and equipment.

On the spending side, Ottawa pledged almost C$12 billion for infrastructure projects such as roads, bridges and clean energy programs over the next two years. It will be disciplined about closing the funding taps after that, Flaherty said. "I am certain we will limit these programs to two years ... so it's use it or lose it on infrastructure," he said.

The budget also seeks to improve access to financing by committing an additional C$50 billion to a total of C$125 billion for a program that buys insured mortgages, and by giving itself the authority to inject capital into banks and financial firms that need support.

It also vowed to set up several programs to help thaw credit markets, including creating a secured credit facility with up to C$12 billion to support financing of vehicles and equipment for consumers and businesses.

The plan also includes up to C$7.8 billion in tax breaks and funding to spur housing construction over the next two years, a move Ottawa hopes will boost hard hit industries such as forestry and building products suppliers.

($1=$1.23 Canadian)

Additional reporting by Jeffrey Hodgson and Randall Palmer; editing by Peter Galloway and Rob Wilson

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