February 26, 2008 / 9:17 PM / in 10 years

Canadian government to survive on modest budget

OTTAWA (Reuters) - The Conservative government presented a lean budget on Tuesday, designed to steer a steady course through tough economic times, but offering enough treats to prevent the opposition from voting it out of office.

<p>Finance Minister Jim Flaherty smiles as he prepares to deliver the budget in the House of Commons on Parliament Hill, February 26, 2008. REUTERS/Chris Wattie</p>

The Liberal Party, trailing the Conservatives in many polls, quickly signaled it would back the budget even though they considered it a shallow document.

“In the circumstances, I don’t see enough in this budget that would justify that we precipitate an election that Canadians do not want for now,” Liberal leader Stephane Dion said outside the House of Commons, while Finance Minister Jim Flaherty was still delivering his speech.

In a move to encourage saving, Ottawa delivered an unexpected tax-free shelter for Canadians to squirrel away their extra cash, including capital gains.

Foreseeing shrinking revenue this year amid a possible U.S. recession, and also because of its own past tax reductions, Flaherty stuck to his pledge to pay down C$10 billion ($10.2 billion) in debt in 2007-08 and still balance the budget for the 11th consecutive year.

But he broke away from a commitment to reduce debt by at least C$3 billion in subsequent years, opting to inject some stimulus into the economy instead.

“Our government is taking the path that requires focus, prudence and discipline -- it’s an economic plan rooted in reality,” Flaherty told Parliament. “Instead of a year-end spending spree, we are giving Canadians a direct stake in -- and a direct benefit from -- debt reduction.”

There were no blockbuster tax cuts in the plan, with Flaherty saying he had already done the heavy lifting on that front with a C$60 billion tax package last October.

The Conservatives under Prime Minister Stephen Harper, elected in January 2006, have a minority of seats in the House of Commons and need the support of at least one of the three opposition parties to pass legislation.

The separatist Bloc Quebecois and the left-leaning New Democratic Party both said they would vote against the budget, but the Liberal support keeps the government in power, possibly until this autumn at least.

Gleeful Conservatives privately suggested that Liberals were abdicating their role of opposition to the smaller New Democratic Party.

Publicly, Transport Minister Lawrence Cannon told reporters: “The Liberals must have deemed that this is the kind of budget that Canadians need ... I‘m pleased that he’s supporting it.”

ALL ABOUT SAVINGS

The hallmark measure of the 2008-09 spending plan -- and an inexpensive one to start with -- is a tax-free savings account, which would make it easier for people to put away up to C$5,000 of their savings every year, tax-free.

Taking a page from similar schemes in the United States and Britain, Flaherty said Canadians would be able to put their money into a registered account and withdraw from it at any time to pay for expenses such as a new car or starting a business, without paying tax on interest or capital gains.

“Going into this budget it was about managing expectations and talking about prudence and frugality. The cornerstone measure coming out of this (budget) is the new savings account, which is all about trying to spur savings,” said Pascal Gauthier, economist at TD Bank Financial Group.

The Conservatives’ promise in the last election campaign to defer the tax on capital gains for those who reinvest their assets remains outstanding.

Expectations were high that Flaherty would come through with a three-year extension of a temporary measure allowing manufacturers to write off investments in machinery and equipment over two years, or at a rate of 50 percent a year.

But his budget disappointed industry players with a one-year extension of the 50 percent rate followed by declining rates in the following two years.

“(The budget) doesn’t mean very much at all for the most innovative sector of the economy, the most competitive sector of the economy, and the sector most at risk,” said Jayson Myers, president of the Canadian Manufacturers and Exporters.

As Canada’s economy is dragged down by slowing exports to the United States and tax cuts take effect, fiscal revenues are projected to decline to 15.3 percent of gross domestic product in 2008-09 from 16 percent in 2007-08 percent.

Ottawa’s debt payment will dip to C$2.3 billion in 2008-09 and to only C$1.3 billion the following year. That contradicts the government’s promise -- as recently as last fall -- to pay down “at least” C$3 billion in debt every year.

However, the total debt paydown over the three-year period from 2007 to 2010 is C$13.8 billion, or an annual average of about C$4.6 billion. The government returns to its promise of a C$3 billion debt reduction in 2010-11.

($1=$0.98 Canadian)

Additional reporting by David Ljunggren and Ka Yan Ng; Editing by Randall Palmer and Rob Wilson

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