Finance Minister Jim Flaherty has delivered a cautious, business-friendly budget that will likely be shelved as the country heads into an election, raising concerns about an uncertain investment climate in a volatile global economy.
After two years of stimulus measures, the Conservative government rejected opposition demands for more social spending and instead focused on restraint and deficit reduction.
As a result, all three opposition parties are vowing to defeat the budget and force an election. And in a preview of that campaign, the Finance Minister sought to contrast the pro-business agenda with an opposition that he characterized as eager to raise taxes.
Mr. Flaherty said new jobs will have to come from the private sector rather than government spending and branded his budget "a low-tax plan to create jobs." But he provided few tax breaks for specific individuals, while extending some corporate incentives and eliminating others.
In fact, the minister did not even mention the biggest business tax cut looming - an already-legislated 1.5-percentage-point cut in the corporate income tax rate that takes effect Jan. 1. Opposition parties have urged the government to reverse that measure, which is estimated to cost the treasury $2.85-billion by 2013.
But Mr. Flaherty said the global recovery remains fragile, and tax cuts contained in this and previous budgets "are helping employers to invest, grow and create jobs."
"The corporate sector will be watching closely," said Bank of Montreal economist Douglas Porter, noting that in this election, there will be at least one major divergence in the economic philosophies of the two main parties - namely, corporate tax cuts.
In addition, "markets won't be particularly thrilled to have another election so soon," he said, adding that there might be some short term volatility in the Canadian dollar as a result.
Manufacturers are eager to see an extension of the accelerated capital cost allowance, which gives companies generous writeoffs for investment in machinery and equipment. That provision was due to run out this year, and Mr. Flaherty promised to extend it by two years.
"If the budget is defeated, it's a real concern for manufacturers," said Jay Myers, president of Canadian Manufacturers and Exporters. "This two-year writeoff comes to an end at the end of this year and that extension is essential if we're going to keep investment going in the sector. It would be nice to have a little bit of certainty that companies would be able to take advantage of that over the next two years."
Mr. Myers said he is also worried about the future of the planned corporate income tax cuts planned for January 1, and said the uncertainty would make it more difficult for companies to plan investments.
The CCA extension was broadly supported by opposition parties as well as the Conservatives, and so would likely be reinstated when the next budget is tabled after an election.
Mel Svendsen, CEO of Standen's Ltd., a Calgary-based manufacturer of equipment for auto and farm markets, said the extension of the capital cost allowance is "very positive" for Canada's beleaguered manufacturing sector.
While an election might delay implementation of these measures, Mr. Svendsen said even a change in government wouldn't likely end them. "Whatever party gets in, they're going to have to keep their eye on the economic ball." The Finance Department estimates the extension will cost $620-million over four years.
Business lobby groups applauded the minister's deficit reduction plan that does not broadly raise taxes. But some economists and executives expressed concerns about the upheaval caused by election politicking.
"This is a really unfortunate turn of events," Ian Russell, CEO of the Investment Industry Association of Canada, said after NDP Leader Jack Layton said he would not support the budget.
An election would be a bad thing for Canadian capital markets, and would add to the already cloudy situation for investment in Canada, Mr. Russell said. The business community was still waiting for clarity from Ottawa on the Investment Canada Act in the wake of the government's rejection of BHP's $38.6-billion (U.S.) hostile bid for Potash Corp. If the government falls, that clarity is further away.
Mr. Flaherty also planned to phase out some tax incentives enjoyed by oil sands producers - a move that would boost the industry's tax bill by up to $75-million a year. While that measure would be put on hold if the opposition votes the budget down, the industry can expect it be re-instated in the future, no matter which party forms the government.
But other sectors that were the target of specific measures must now wait until the political situation is clearer.
The budget extended the EcoEnergy Retrofit-Homes program, which helps pay for the cost of making homes more energy efficient, with $400-million of new money. But Jeff Murdock, vice-president of Building Insight Technologies Inc., a Vancouver company that performs home energy audits in Ontario and British Columbia, said his business -- and the whole energy retrofit industry -- will be in limbo if an election is called.
With the current EcoEnergy Retrofit - Homes program set to expire on March 31, "up to 1,000 home energy audit businesses will be out of work across Canada," Mr. Murdock said.