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Little room seen left for tax cuts Add to ...

The federal government's string of surpluses appears to be safe for several years to come, but Ottawa will have little room for further tax cuts or fresh spending initiatives, according to two new forecasts.

Economists at Toronto-Dominion Bank and DRI-WEFA Inc. said yesterday that the surplus will continue to erode for the next two or three years, leaving Finance Minister Paul Martin with little scope for new measures of any kind.

Don Drummond and Derek Burleton of TD said in a report that Ottawa has some room for further tax or spending moves. But unless the government identifies new areas for saving money, it "could not at this time announce any new measures that had a cost extending out to fiscal 2004-05," they said.

"In practical terms, the government is really constrained from taking any new measures, even in the near term. It is very rare that any initiative, even if announced as a short-term measure, doesn't ultimately get extended. And temporary tax relief is not what the economy needs. In order to improve the incentives to work, save and invest, tax relief must be announced as being permanent."

Economist Dale Orr of DRI-WEFA was even more blunt: "No more spending can be planned at this time without leaving a deficit on a forward planning basis," he said in a short commentary on the outlook.

Both forecasters produced projections of federal revenue and spending running out for several years - the TD team to 2006-07 and Mr. Orr to 2004-05. That was something Mr. Martin failed to do in his economic update last week, which contained only a two-year forecast of the surplus - out to 2002-03 - but no full accounting of where total revenue and spending will go.

The DRI-WEFA outlook sees trouble looming in 2003-04. By then, Mr. Orr figures, revenue of $181-billion will be enough to cover program spending of $136-billion and interest charges of $40-billion. That would leave an underlying surplus of $5-billion, which is not as healthy as it might look.

Ottawa's practice in dealing with such distant periods is to set aside money as insurance against adverse economic conditions and unforeseen contingencies. For 2003-04, it would be $5-billion, which would leave the budget balanced for planning purposes and offer the government no room for new measures.

According to the TD forecast, Ottawa will face its tightest time a year later - in 2004-05, when the government will take in revenue of $186.7-billion, while spending $141.7-billion on programs and another $39.5-billion in interest on the public debt.

That would leave an underlying surplus of only $5.5-billion, but because the insurance reserve for that year would rise to $6-billion, the bottom line would be a planning deficit of $500-million, something Mr. Martin has said he will not do.



 

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