February 1, 2008 / 12:39 AM / in 10 years

Canada says tough times a challenge for budget

OTTAWA (Reuters) - Canada is better placed than other members of the Group of Seven industrialized nations to withstand the difficulties likely to confront the global economy this year, Finance Minister Jim Flaherty said on Thursday.

Flaherty told reporters that this year’s difficulties would constrain the budget he is expected to bring down in February or early March, but said “there is more to be done” to help manufacturers buy machinery and equipment to boost productivity.

In his last budget, Flaherty introduced special help for manufacturers, which are struggling to compete due to the strong Canadian dollar and softening U.S. demand. The so-called accelerated capital cost allowance allows manufacturers to write off their investments in machinery and equipment over two years instead of the normal seven years.

This measure was set to last for two years but industry groups have asked to have it extended.

“It’s working,” Flaherty said. “There’s more that can be done, particularly with respect to acquisition of new machinery and equipment, because, once again, if we don’t have a more productive manufacturing sector we will not have a vibrant manufacturing sector in Canada,” he said.

He gave no other clues as to what his next budget will contain, saying most of the heavy lifting had already been done in a tax-cut announcement last October.

“We expect slower economic growth than we anticipated several months ago and the risks are on the downside, so we will be careful and fiscally prudent in our budgeting this year,” he said. “We will maintain a surplus, of course, but it’s a challenging year budget-wise.”

Flaherty said his team would work over the weekend and all next week on the budget, but gave no date for it to be unveiled.

The Conservative government has not forgotten its electoral promise of a deferral of the capital gains tax, Flaherty said, but he would not commit to putting the measure in the budget. He said the measure was under “active review.”

“This is not something that we’ve ignored. We’ve worked quite hard on it. I’ve looked closely at what’s been done elsewhere,” he said.

The government is also looking at the possibility of lowering income taxes for high-income individuals as a way of keeping skilled professionals in Canada rather than have them lured to employment in the United States, where they would pay less tax on the same income.

Flaherty told reporters that Canada’s economic fundamentals are strong.

“Our housing sector remains strong in Canada in stark contrast to the United States. We’ve been paying down debt in stark contrast to the United States, and we’ve been running surpluses, which is different from our neighbors.”

Reporting by Randall Palmer and Louise Egan; Editing by Peter Galloway

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