OTTAWA — The federal budget prepares the national economy for a few clouds on the horizon, but it doesn't shelter the country for a rainy day.
Finance Minister Jim Flaherty assumes a mild, short-lived slowdown for the Canadian economy, and includes little in terms of new near-term stimulus to help Canadians through the rough patch.
The sluggish economy receives a boost from the $50-million-a-year fund for the deeply troubled auto sector, and a $500-million trust fund for the provinces to spend on public transit infrastructure.
But the Conservatives point mainly to previously announced tax cuts and a $1-billion fund for single-industry towns as their key defence against a slump. The tax cuts will inject $21-billion into the economy over the coming year, the budget shows.
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“The overall Canadian economy will likely grow more slowly over the next two years,” Mr. Flaherty said. “Meeting these challenges is critical. Not just for our country, but for our families.”
Even with the modest measures announced Tuesday, Ottawa is treading close to the deficit line, especially next year. There is no contingency reserve or rainy-day fund, and Mr. Flaherty admitted he won't be able to pay $3-billion every year on the federal debt as initially anticipated.
Instead, Ottawa foresees a slim surplus of $2.3-billion in the coming fiscal year, and just $1.3-billion in the 2009-1010 fiscal year, despite a huge $10-billion payment on the debt scheduled for the fiscal year that is just coming to a close.
While Ottawa's assumptions for economic growth in Canada and the United States align exactly with prevalent thinking among private-sector economists, there is almost nothing left over if the economy takes a turn for the worse, or if the slowdown drags on longer than expected.
“The door is wide open to have a budget deficit if things switch from bad to worse,” said Clement Gignac, chief economist at National Bank Financial.
Plus, the official forecast of 1.7 per cent growth for Canada in 2008 implies a near-recession in Ontario and Quebec this year and probably in Atlantic Canada too, said Glen Hodgson, chief economist for the Conference Board of Canada.
The budget documents show that if growth in Canada is half a percentage point lower in 2008 than the 1.7 per cent in the official forecast, Ottawa's surplus would be $1.65-billion lower this year, and $1.4-billion lower in 2009, although there would be some offset coming from the lower interest rates.
And that scenario is a distinct possibility. Economists have repeatedly pared back their projections for the U.S. economy over the past three months, and increasingly believe Canada's prospects are tied to the American economy.
The federal government's insistence that it will not, under any circumstances, run a deficit, place it in an “ideological straitjacket” if the worst-case scenario materializes, commented Jeff Rubin, chief economist at CIBC World Markets.
“We may be denying ourselves the fiscal flexibility that we need.”
Still, the federal government will likely pull in an additional $1.5-billion in revenue from its auction of broadband spectrum in the coming fiscal year. Plus, income-tax revenues frequently seem to be higher than actually forecast. So there is little concern at the Department of Finance that a deficit would ever creep up on them.
Traditionally, government spending is vital during a downturn since it can stimulate the economy at large, and because it can target spending and tax incentives to help troubled areas of the economy recover.
This time, however, Canada's trouble spots get the cold shoulder, say lobbyists for the forestry and manufacturing sectors.
“It seems to me that in this grab-bag full of goodies, there's not much in terms of economic strategy behind the budget,” said Jay Myers, who heads the Canadian Manufacturers and Exporters.
The forestry sector receives $10-million over two years, while manufacturers get a one-year extension added to their preferential capital-cost allowance. Tourism – another sector expected to be hit by a high dollar and a slowing American economy – does not receive any attention in the budget.
Rather, the budget trumpets the Conservatives' debt payments, which are expected to add up to more than $50-billion by fiscal year 2012-13. And sources say the Conservatives are adamant about using tax cuts to stimulate the economy, instead of picking winners and losers to subsidize.
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