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Flaherty's 'tough' budget may still be a year away

Jim Flaherty will never be Bay Street's favourite Finance Minister. But the man who authored the largest deficit in Canadian history is not deaf to the mood of business, and his fifth budget proves it.

The government's new fiscal plan strikes a tone that is nearly identical to the one that prevails in corporate Canada right now. Many business executives, still absorbing the shock of the sharp economic downturn of 2008-09, are sitting on their hands, going slow, waiting for firm signals of recovery. So is Mr. Flaherty. They're biding their time before they make the hard decisions about what to do next. So is Mr. Flaherty.


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The result is a budget that lacks ambition. The document might be most accurately described as a stimulus plan for the paper industry, as it consumes 450 pages where 100 would do. If you're looking for bold tax moves or creative spending cuts, forget it. Instead, much ink is spilled rehashing the 2009 budget. There are more than a dozen references to the home renovation tax credit - which expired more than a month ago and isn't being renewed.

"Look, this is a tough budget," the minister said yesterday. "This is probably the smallest budget in terms of new spending in about 10 years."

"Tough"? Not so much. When you are planning to spend $94-billion more than you're taking in over three years, you are not exactly straining your arms to swing the axe. Yes, the growth in program spending this year is very modest, less than $12-billion. But that's because last year's spending was so massive. By fiscal 2012, by which time the government's recession stimulus plan will no longer exist, Ottawa's spending on programs will still be $33-billion higher than it was in fiscal 2009.

Mr. Flaherty's road map to the balanced budget contemplates few serious cuts at all, in fact. The growth in military spending will be restrained, and foreign aid takes a hit, and of course there's the budget freeze on government salaries and travel, announced in Wednesday's Throne Speech. But unlike the mid-1990s war on the deficit, the big-ticket items - transfers to provinces, money for seniors and children, benefits for the unemployed - are untouched. That's about half the budget right there.

So it's up to the taxpayer to do the heavy lifting. For the current fiscal year, Ottawa projects a deficit of about $54-billion. Five years from now, that deficit is meant to be nearly gone. How?

With an $83-billion increase in revenue, that's how. About half of that is to come from higher receipts from personal income tax.

It could happen, and there is recent precedent for it. The Flaherty formula is similar to the one the Chrétien government used in the 1990s to slay the deficit: Pull back the spending just a little and wait for a gusher of tax revenues. Paul Martin earned a lot of credit, but a revenue increase of about $100-billion during the Liberals' term in office had much to do with their reputation for fiscal management.

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Will the Tories be as fortunate as the Liberals were? Let's put it this way: they will have to be. To get back to a balanced budget, the government has made the following assumptions: a Goldilocks economy - not too hot, not too cold - that grows about 3 per cent a year from now to 2015; a soft landing for the real estate market, with no decline in home prices; a solid rebound in private consumption and exports; a drop in unemployment to about 6.5 per cent by 2015; and a moderate rise in interest rates.

Taken individually, none of these assumptions is outrageous. But the whole picture is more worrisome: a lot has to go right for the government to stay on course, including things that are out of its control, such the pace of the U.S. recovery, where the economic data has been ugly of late.

Canada relies on exports for 35 per cent of its economy, and most of that still goes to the U.S. If America stumbles, Mr. Flaherty may have no choice next year but to deliver some pain, and table a truly "tough" budget.

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