March 4, 2010 / 9:15 PM / 8 years ago

Canada budget tackles deficit, averts election

OTTAWA (Reuters) - Canada’s minority Conservative government outlined plans to rein in a record-large deficit on Thursday, presenting a budget that lets it keep its grip on power for now.

<p>Canada's Finance Minister Jim Flaherty (L) delivers his budget as Prime Minister Stephen Harper (R) listens in the House of Commons on Parliament Hill in Ottawa March 4, 2010. REUTERS/Chris Wattie</p>

Michael Ignatieff, leader of the main opposition Liberals, said Liberals would vote against the budget, but not in large enough numbers to bring the government down.

Ignatieff, who dismissed the budget as nothing more than “cuts, freezes and gimmicks,” can instruct Liberal lawmakers to be absent or abstain from key confidence votes in Parliament.

The stay-the-course plan contained few surprises for markets, although the Canadian dollar edged a little lower.

The government said the deficit in the year to March 31 will be slightly smaller than expected at C$53.8 billion ($52.2 billion), after a previous forecast a gap of C$55.9 billion.

That is partly because a two-year, C$47.2 billion economic stimulus package was slow to get started, so more spending will be pushed into 2010-11.

The government now forecasts a 2010-11 deficit of C$49.2 billion, up from C$45.3 billion predicted earlier. It expects that to narrow to C$1.8 billion by 2014-15 as the government cuts spending.

“This is a tough budget,” Finance Minister Jim Flaherty told a news conference.

Flaherty said the budget would be in surplus by 2015-16, provided all went according to plan.

Canada’s Conservative government has only a minority of seats in Parliament and needs the support of at least one opposition party to pass this budget and stay in power. Polls show neither party winning even a workable minority government if an election were held now.

The government had widely telegraphed plans to limit the rate of growth in federal spending, but it put more flesh on those plans in projections that analysts said were credible but tough, provided the economy recovers at a healthy clip.

“The real test will be whether the economy can withstand the very sudden ending of the stimulus program a year from now,” said Doug Porter, deputy chief economist at BMO Capital Markets.

TIGHTROPE

Ottawa is walking a tightrope in this budget.

On the one hand, it must show Canadians, still shell-shocked from the worst recession in decades, that it is supporting economic recovery and creating jobs.

But it must also address widespread concerns that the budget deficit will become a longer-term, structural problem, and it must recognize the possibility that economic problems in other countries will undermine its own upbeat forecasts.

Canada, with strong, well-capitalized banks, was hit less severely than most other rich nations by the world recession.

In an announcement that was slightly more aggressive than expected, the government said it planned to limit annual spending growth to about 2.5 percent - less than half the average annual increase of the previous decade.

It repeated a promise not to raise taxes, and said it would cut tariffs and go ahead with planned corporate tax cuts.

“They are trying to stay true to their commitment in not taking the tax route to reducing that deficit and to balancing it over the medium term,” said Paul Ferley, assistant chief economist at RBC.

“Their projections on program expenditure will put the deficit on a downward trajectory, but 2.5 percent is tight.”

About a third of the savings will come from cost crackdowns, including a freeze on departmental operating budget at 2010-11 levels and frozen salaries for the prime minister and lawmakers.

The government will cap the foreign aid budget at 2010-11 levels and take a new look at defense spending once the military mission in Afghanistan ends in 2011.

Defense spending -- about one-fifth of total government direct program spending -- will keep growing, but at a slower pace. The government said tougher enforcement of tax laws and other smaller spending cuts would also shrink the budget gap.

The government is under political pressure to balance the books. Canada, in contrast to other industrialized nations, ran a budget surplus before the world economy melted down, and there is little political appetite for long-term deficits.

The government said Canada’s deficit will peak at about 3.5 percent of GDP and total net debt, including provincial debt and public pension assets, will stay the lowest in the G7 as a proportion of GDP -- about 29 percent in 2014.

Additional reporting by David Ljunggren, Pav Jordan, Jeffrey Hodgson and Howaida Sorour, editing by Janet Guttsman

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