March 29, 2012 / 8:23 PM / 6 years ago

Canada deficit shrinks, reforms spark anger

OTTAWA (Reuters) - Canada opted for the slow road to a balanced budget and kept spending cuts relatively mild in a cautious budget on Thursday that was nonetheless packed with controversial reforms that ranged from raising the retirement age to fast-tracking approvals for big oil and mining projects.

Canada's Prime Minister Stephen Harper and Finance Minister Jim Flaherty hold copies of the budget as they walk to the House of Commons to deliver the budget on Parliament Hill in Ottawa March 29, 2012. REUTERS/Patrick Doyle

The Conservative government maintained a promise made last year to eliminate its budget deficit, small by international standards at 1.5 percent of gross domestic product, by the 2015-16 fiscal year after adjusting for promised spending cuts. It cuts discretionary spending by 6.9 percent as of 2014-15, on the low end of expectations.

Analysts say Ottawa could easily close the budget gap a year earlier due to a better-than-expected fiscal performance this year, an improved economic outlook and a contingency cushion built into the numbers.

The budget deficit for the current year ending March 31 is now seen at C$24.9 billion ($24.9 billion), almost C$6 billion lower than estimated in November. That gap will narrow to C$21.1 billion in 2012-13 and continue shrinking until a surplus of C$3.4 billion is reached in 2015-16, according to the government’s estimates.

In reality, analysts see an underlying surplus as early as 2014-15 if you strip away the government’s C$3 billion downward adjustment for risk to revenues.

“If there are surprises, it’s probably to the good side, not the bad side,” said Craig Wright, chief economist at the Royal Bank of Canada.

“When you look at fiscal projections, what you like to see is conservative economic assumptions and we’ve got those. There is a good amount of prudence in the economic projections and there is that adjustment for risk,” he said.

The budget was Prime Minister Stephen Harper’s first opportunity to present a major new plan since his Conservatives won a decisive majority in the May 2011 election following five years of unstable minority government. Because of the majority, passage of the budget is assured.

Harper has billed it as a “transformational” plan for long-term prosperity because of sweeping and controversial changes to pensions, immigration, environmental regulations and innovation.

But the changes triggered immediate outrage from the opposition parties in Parliament, environmentalists and labor leaders.

“In the long term the continuation of these Conservative policies will leave the greatest economic, ecological and social debt in our history in the backpacks of future generations. That’s the result of the choices that the Conservatives are making today,” said Thomas Mulcair, leader of the main opposition New Democratic Party.

Liberal leader Bob Rae called it a “very mean-minded, small-minded budget.”

Financial markets, however, seemed comforted by the plan, with the Canadian dollar unchanged against the U.S. dollar after the budget was released. Prices for 10-year bonds dipped slightly.

Balanced budgets are a source of national pride in Canada after a painful austerity exercise in the mid-1990s led to an 11-year string of surpluses. Harper reluctantly oversaw a decline into deficit due partly to a stimulus program during the 2008-09 recession and partly to earlier tax cuts, but vowed to deliver a fiscal turnaround once the recovery was underway.


Canada’s latest version of austerity, however, pales in comparison with that in the United Kingdom, and Finance Minister Jim Flaherty said the long-term plan would give the “AAA”-rated country an even bigger advantage over other major economies.

“We’re realizing that quite frankly, some of our Western traditional economic allies and other allies will not have economies of great strength in all likelihood in the next while, and we want to be in the next league,” Flaherty told reporters ahead of his budget speech.

“We want to be with the emerging economies, we want to be with the economies of South America that are growing, and we’re in a position in this country to get there.”

The debt-to-GDP ratio is set to decline to 28.5 percent by 2016-17, roughly in line with pre-recession levels, from 33.9 percent this year.

“They could spend less to bring the zero deficit a year earlier, but they didn’t go that route,” said Sebastian Lavoie, assistant chief economist at Laurentian Bank. “They wanted to buy some time, stay the course for maybe another year until we move closer to an election year. Some market participants will like their prudence.”

The battle for public opinion in the run-up to the budget centered on the government’s commitment to find savings across the federal bureaucracy of between C$4 billion and C$8 billion a year, or roughly 5 percent to 10 percent of discretionary spending.

Again, Ottawa avoided the most draconian route with savings of C$5.2 billion , or 6.9 percent of an envelope of C$75.3 billion, which excludes transfer payments to other levels of government and to individuals.

Still, the move will kill 19,200 public service jobs over three years, or about 5 percent of total federal employment. Of those, about 7,000 will occur through attrition, the government said.

The plan also touches many sensitive nerves by slashing the budget of public broadcaster CBC by 10 percent and by scrapping the penny coin.


On the policy front, the government said it would follow in the footsteps of countries such as Australia, France, Germany and the United States by raising the age of eligibility for Old Age Security, a key pillar of the country’s pension program. The increase to 67 years from 65 will be gradually phased in starting in 2023, with full implementation by 2029. The Canada Pension Plan will not change.

“It’s a very reasonable transition period,” said Albert Baker, partner with Deloitte. “All countries are living through the baby boomer effect and so the cost of that program is going to triple, so countries around the world are taking the necessary steps.”

Immigration policy, an emotionally charged topic in a country that has traditionally welcomed newcomers, will also be revamped to cut a huge backlog of applications from skilled workers and ensure newcomers fill the country’s current labor needs.

The right-of-center government, which has a strong voter base in oil-rich Alberta, said it would overhaul the regulatory review process for oil pipelines, large mines and other natural resource projects. It aims to impose firm time limits on regulatory hearings, ensure each project is reviewed only once and cut the number of environmental assessments.

Finally, it lopped C$1.3 billion from federal support programs for business research and development, reallocating funds in a bid to reverse the country’s sorry record on innovation.

($1=$1.00 Canadian)

Additional reporting by Randall Palmer, David Ljunggren, and Ora Morison; Editing by Jeffrey Hodgson; and Peter Galloway

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