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Canada's Finance Minister Jim Flaherty speaks during a news conference in Ottawa March 1, 2013. The slowing Canadian economy means the government will have lower revenues than it initially forecast as it draws up the next budget, which is due soon, Flaherty said on Friday. (CHRIS WATTIE/REUTERS)
Canada's Finance Minister Jim Flaherty speaks during a news conference in Ottawa March 1, 2013. The slowing Canadian economy means the government will have lower revenues than it initially forecast as it draws up the next budget, which is due soon, Flaherty said on Friday. (CHRIS WATTIE/REUTERS)

Federal budget

Flaherty to cut spending in response to weak growth forecast Add to ...

Finance Minister Jim Flaherty intends to freeze or cut spending on programs, defer capital expenditures and eliminate some corporate-tax exemptions to help close the gap on a $2.1-billion shortfall in revenues for 2013, The Globe and Mail has learned.

The new tax revenues and spending cuts are a fraction of a discretionary spending envelope that was more than $110-billion last year. But they reflect a revision downward of the Harper government’s economic growth forecast for the year ahead, to 1.6 per cent from an earlier estimate of 2 per cent. How the government plans to absorb the latest cuts while protecting spending priorities and eliminating the deficit by 2015 will be revealed Thursday, when Mr. Flaherty brings down this year’s budget.

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Long-term spending plans remain unaffected, with a reviving U.S. economy improving the fiscal outlook for the last half of the decade, according to several senior government officials who are not authorized to speak publicly.

In an effort to focus attention on the most positive aspects of what is essentially an austerity budget, officials emphasized that the shortfall will not affect its major theme: spurring job creation while adjusting programs in order to better match workers to positions employers are trying to fill.

Weakening commodity prices and sluggish growth throughout the developed world have played havoc with the fiscal projections contained in last November’s fiscal update.

Thursday’s budget will reveal that the real gross domestic product, which includes growth minus inflation, is expected to expand by only 1.6 per cent in 2013, instead of the 2 per cent projected in the November fiscal update. Nominal GDP, which includes inflation, has been revised to rise by 3.3 per cent, instead of a projected 4 per cent.

This leaves Mr. Flaherty with an estimated $2.1-billion less in revenue to work with than he anticipated only four short months ago.

Most federal government spending consists of transfers to individuals – through such programs as pensions and unemployment insurance – and to provincial governments for health, education and social programs, as well as through equalization payments to poorer provinces. None of these planned transfers will be affected by the revenue shortfall, the officials said.

Instead, the extra savings will come from limiting the growth of “discretionary spending,” which entails direct federal spending on programs and services. The 2012 budget projected that spending would come to $114-billion in the coming year.

Part of the shortfall will be absorbed by National Defence. The Canadian Press reports that the department will be asked to absorb an 8-per-cent hit to its operating and maintenance budget, representing a revenue loss of $32-million. This latest cut comes on top of $226-million previously ordered.

Other areas could include environmental regulations, inspections, border security and other government programs.

Another area in which the government hopes to save money is through deferring capital spending. The Globe and Mail reported Saturday that the budget will contain up to $30-billion in planned infrastructure spending for municipalities. The government has also committed to tens of billions of dollars in equipping the Canadian Forces with new ships and fighter aircraft.

But the officials noted that not all capital spending needs to occur in the first years of a program, meaning that the government could save money this year by deferring capital spending until future years.

As well, the government is expected to raise additional revenue by eliminating some corporate-tax exemptions. And additional revenue is expected from an auction of wireless spectrum to telecom companies.

Larry Rousseau, speaking on behalf of the Public Service Alliance of Canada, warned that any further cuts would be penny wise and pound foolish, depriving Canadians of vital government services while starving the economy of much-needed government spending.

“I cannot believe that the Conservatives continue to be seen as stewards of a good healthy economy when they make these economic choices that are shooting Canada in the foot,” he said in an interview.

But the officials insisted that the cuts could be absorbed while protecting major spending priorities and balancing the budget in two years – a target that Prime Minister Stephen Harper has declared must be met.

Editor's note: An earlier version of this article incorrectly identified the group that Larry Rousseau speaks on behalf of. That group is the Public Service Alliance of Canada. This online version has been corrected.

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