Steady budget offers few surprises

Finance Minister Jim Flaherty had few surprises in the federal budget he unveiled in Ottawa Thursday, pledging to continue the stimulus measures rolled out in the last year while vowing to return to balanced books as soon as possible.

"We have [taken] extraordinary measures to protect the Canadian economy," Flaherty told MPs in the House of Commons. "Like virtually all other countries, we needed to run a substantial deficit to do so. But unlike other countries, we are in a position to ensure our deficit will be temporary."

When he delivered the last federal budget, dubbed Canada's Economic Action Plan, in January 2009, he pitched it as a two-year plan to pull Canada out of the recession. The latest budget stays largely true to that, continuing to roll out the stimulus spending already announced while winding down other temporary measures and taking initial steps to tackle Canada's first budget deficit since the mid-1990s.

On top of the $37 billion in economic stimulus funding spent last year, the new budget outlines the specifics of the additional $19 billion that is to be spent this year, which will be beefed up with $6 billion from provinces, territories and municipalities. By the time it's wound down in 2011, the stimulus plan will have funded more than 16,000 projects across the country, more than 12,000 of which have begun construction or have been completed within the past year, the budget document says.

"In addition to delivering Year 2 of Canada's Economic Action Plan, Budget 2010 introduces a limited number of new and targeted actions to protect Canadians from the global recession and create the jobs and economy of tomorrow," Flaherty said.

Within the $19 billion is $3.2 billion in personal tax relief, including increasing the basic personal amount of tax-free income by $62 to $10,382.  

The government will direct $4 billion of the $19 billion toward extending EI benefits to more people for longer and to training opportunities for the unemployed.

A further $7.7 billion was earmarked for infrastructure projects across the country, along with $1.9 billion to be invested in research and foreign talent acquisition intended to improve the productivity of Canadian businesses.

Finally, $2.2 billion has been committed to support industries and communities particularly hard hit by the economic slowdown, including forestry, agriculture, tourism and culture.

The government will do it all, Flaherty said Thursday, without having to raise taxes or cut major transfers to the provinces or individuals, but it will likely require some tough spending decisions.

Deficits to come

Last year, Flaherty projected a $33.7 billion deficit for the 2009-10 fiscal year, and $29.8 billion in 2010-11. In reality, the deficit for the current fiscal year, which ends March 31, will be $53.8 billion and is projected to decrease to $49.2 billion in 2010-11.

Private sector economists have forecast deficits even higher than that. A $700 million surplus was originally expected by 2013, but Ottawa now projects public finances will not return to the black until 2016 at the earliest.

"In this budget, we will also take action to ensure government lives within its means," Flaherty said.

The government's plan to get ahead of its $54 billion deficit is built largely on the back of $17.6 billion worth of savings over the next five years that will come from streamlining and reducing the operating and administrative costs of government departments. That plus a broadening tax base as the economy improves will be enough to bridge the gap, Flaherty said.

Ottawa identified five areas for belt tightening. The Department of National Defence will get less money than previously anticipated over the next few years. By slowing the rate of previously planned growth in the defence budget, Ottawa hopes to save $525 million in 2012-13 and $1 billion annually thereafter.

The slowdown will not come until 2012 so as to not interfere with the Afghanistan mission, the government said.

In addition, Ottawa will spend less than previously projected on foreign aid. Canada will meet its commitment to devote $5 billion annually to foreign aid by devoting an additional $364 million to the International Assistance Envelope this year. It had planned to hike foreign aid by eight per cent per year. The capping of aid at 2011 levels will save an additional $1.8 billion by 2014, the budget forecasts.

Streamlining of government departments, which is to include improving efficiency and redirecting existing funds from low- to high-priority areas, is expected to save about $1.2 billion by 2014.

Closing tax loopholes is expected to save Ottawa more than $2.5 billion over the next five years, but the lion's share of the $17.6 billion in savings will come from what the budget calls "containing the administrative cost of government." That's mainly the salary and benefits of government employees, and beginning this fiscal year, departmental budgets in those areas will be frozen.

The commitment to annual wage increases of 1.5 per cent for civil servants will be honoured, but departments will have to use existing budgets to fund it. Not filling vacancies and job attrition could help fill the funding gap, and operating budgets will be frozen at 2010 levels for the two subsequent fiscal years.

As announced earlier this week, Ottawa will introduce legislation to freeze the salaries of the prime minister, ministers, members of Parliament and senators, and Flaherty encouraged other government departments to voluntarily follow suit.

"Fairness requires that government, too, should have to keep costs under control," Flaherty said.

Financial reforms

The budget document also paid lip service to two issues close to Flaherty's heart but offered few new details on either. Ottawa will move ahead with "a majority of provinces" toward the creation of a national securities regulator. Several provinces, especially Quebec, have been cool to the idea of surrendering control from a provincial regulator to a national agency. The hope is to have a national securities regulator up and running within three years, the budget states.

Earlier this year, Flaherty proposed a code of conduct for the debit and credit card industry, aimed at reining in fees charged to retailers and often downloaded onto consumers for using point of sale terminals at retail outlets. The original code of conduct was voluntary, and the budget stopped well short of making it mandatory. But Flaherty left open the possibility of eventually introducing legislation that would give the finance minister "the authority to regulate the market ... if required."

The budget also contained a number of measures aimed at younger workers, including $10 million in new funding for the Canadian Youth Business Foundation, $30 million to support secondary education for First Nations students and $20 million for the Pathways to Education Canada program for disadvantaged youth. More generally, the government will expand the popular work-sharing initiative introduced in last year's stimulus plan. Existing or recently terminated work-sharing agreements will be extended by an additional 26 weeks to maximum of 78 weeks. Workers can take advantage of such agreements until March 31,2011.

The budget also aims to make it easier to do business in Canada, Flaherty said. Last year's budget eliminated tariffs on a broad range of machinery and equipment for manufacturers in Canada. This year's budget extends that measure, with the aim of eliminating all remaining tariffs on manufacturing inputs and machinery and equipment by 2015, a move it says will save Canadian businesses $300 million annually in duties, helping to lower the costs of Canadian-made goods for consumers.

"This will give Canada the status of being the first G20 country to become a tariff-free zone for manufacturers," Flaherty said.

To further spur business investment, Ottawa is also pushing ahead with plans to make Canada the country with the lowest corporate income tax rate in the G8 by 2012. At 22 per cent in 2007, Canada's corporate tax rate is on pace to fall to 15 per cent by 2012. With the overall decline in corporate profitability last year, Ottawa will take in 24 per cent less in corporate taxes this fiscal year. But the 2010 budget forecasts that corporate tax revenues will increase by roughly 14 per cent in 2010-11.

In the days leading up to the budget, there was speculation that the popular home renovation tax credit introduced last year might be extended, but it was not. Under the program, homeowners received up to $1,350 in tax relief on home renovation projects. An estimated 4.6 million Canadians took advantage of the program before it expired on Feb. 1, 2010. Ottawa did, however, unveil $80 million in new tax credits available for energy-efficient retrofits by Canadian homeowners.