February 27, 2018 / 9:14 PM / 7 months ago

Canada budget holds fire amid NAFTA clouds, focuses on women

OTTAWA (Reuters) - Canada’s Liberal government tackled long-term growth challenges on Tuesday in a budget aimed at boosting women in the workforce and diversifying trade, while keeping its fiscal powder dry in case of an economic shock like the demise of NAFTA.

Canada's Finance Minister Bill Morneau delivers the budget in the House of Commons on Parliament Hill in Ottawa, Ontario, Canada, February 27, 2018. REUTERS/Chris Wattie

Finance Minister Bill Morneau’s third budget outlined slight deficit improvements without much in the way of new spending, refusing to blink in the face of U.S. corporate tax cuts and trade uncertainty that strike fear into Canadian companies.

“We will be vigilant in making sure Canada remains the best place to invest, create jobs and do business - and we will do this in a responsible and careful way, letting evidence, and not emotion, guide our decisions,” Morneau said in a prepared budget speech.

The budget blueprint, which is bound to be implemented given the Liberal’s parliamentary majority, maintained a C$3 billion ($2.4 billion) fiscal cushion each year to guard against any unexpected event that could hurt the government books.

Even with the cushion, the projected deficit in 2018-2019 declined to C$18.1 billion from C$18.6 billion forecast in October, a restrained target unlikely to have any impact on financial markets or the Bank of Canada’s rate tightening path.

Opposition Conservative leader Andrew Scheer blasted Prime Minister Justin Trudeau’s Liberals for maintaining budget deficits far into the future and adding to the national debt.

For details on key budget measures:

Chief among economic risks is the possible end of the trade deal between Canada, the United States and Mexico, which U.S. President Donald Trump has threatened to terminate. Negotiations to save the pact continue this week in Mexico.

The loss of NAFTA would sideswipe Canada, which sends 75 percent of exports to the United States, and the decision not to slash corporate tax rates in response to the U.S. move puts Canadian companies at a disadvantage.

“There was nothing here that addressed things like the corporate tax cut in the U.S. and what that means for business investment in Canada. There was probably a bit of disappointment on that front,” said Shaun Osborne, chief currency strategist at Scotiabank.

Still, Morneau has given the government room to maneuver should the demise of NAFTA or a housing market collapse hit the economy this year or next.

The unspoken bet is that Canadian exports will benefit from a roaring U.S. economy, even if business investment is lured away by the U.S. tax cuts. Canadian growth is already leading G7 rivals, spurring three rate hikes by the Bank of Canada since July, and the unemployment rate is near a 40-year low.

The budget did not address concerns that voters could come under pressure as rising rates increase the burden of record household debt, which the central bank has flagged as a risk.

Continuing a bid to diversify Canadian trade beyond the United States, the budget earmarked C$75 million over five years to boost diplomatic and trade presence in China and Asia, though recent high-profile trips to China and India have garnered more negative headlines than positive ones.

Focusing on long-term challenges to Canada’s economy, including the aging workforce, the budget pledged measures to boost the participation and pay of women in the workforce, including through improved paternity leave and proactive pay equity legislation in federally regulated sectors.

Morneau also announced the government would set up a panel to consider pharmacare, setting in motion the possible arrival of free drug coverage for voters - who already have access to universal healthcare - in time for the 2019 election, when Trudeau will defend his majority against Conservatives on the right and New Democrats on the left.

Additional reporting by Leah Schnurr and Fergal Smith; Editing by Denny Thomas and Chris Reese

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