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Three 'gale force headwinds' that could hit fiscal outlook Add to ...

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TD cites fiscal headwinds Canada stacks up well in a fiscal comparison to its peers, and cutting the combined federal-provincial deficit in half over the next two years appears well within reach, Toronto-Dominion Bank economists say. But "the harder part will be getting to zero deficits from there," deputy chief economist Derek Burleton and senior economist Pascal Gauthier said in a report today.

"On balance, government budget plans - which are based on private-sector forecasts - have generally assumed relatively lacklustre long-term economic and baseline revenue growth," they said. "What's more, debt-service costs are projected to rise steadly over the next five years. These forces have put the onus on longer-term budget plans to hold program spending growth to about 2 per cent on average post-[fiscal year]2011-12. Even then, the pace of deficit reduction slows dramatically."

They list three "gale-force headwinds" impeding longter-term planning:

  • Modest recovery, lower trend growth: Private sector forecasters are wary about the fiscal challenges of Canada's major trading partners, tougher financial rules, a strong dollar and continuing restructuring among manufacturers. There are also demographic pressure.
  • Faster age-related spending: Canada's aging population will continue to push up costs such in areas such as health care and seniors benefits, a particular issue for the provinces. "Health care has been growing by about 6 per cent to 7 per cent per year across the provinces, and given an aging population, little let-up in health expenditures on a status-quo basis can be expected."
  • Rising interest costs: "These will go up as interest rates rise and debt accumulates. Under the latest budget plans, and based on private sector forecasts for interest rates, this would translate into an increase in the costs of servicing the debt from $51-billion in [fiscal year] 2009-2010]to $71-billion in [fiscal year]2013-14. These higher costs are almost equally spread across the federal and provincial levels of government."


Canadian dollar strong The Canadian dollar is actually down slightly from yesterday but still trading at a high level of about 97.60 cents U.S. It had been up sharply yesterday as oil prices and equities rose, said Scotia Capital currency strategist Sacha Tihanyi.

"Canada is getting more caught up in the 'risk on' trade as opposed to the U.S. growth/inflation woes, reflected primarily in [Canadian dollar] strength," said RBC Dominion Securities analysts Mark Chandler and Kam Bath. "The currency has given up a little ground this morning, but stands at a relatively firm 1.025, with near-term oil price futures back up to $81.70 a barrel. While up about 1 per cent over the past week against the [U.S.dollar, the Canadian dollar]is still underperforming most of the other major currencies over this period."

RIM's new BlackBerry Torch

RIM unveils new BlackBerry Amid the security issues dogging Research In Motion Ltd. in several countries, the Waterloo, Ont.-based technology giant today unveiled a new BlackBerry with a slider keyboard and touch screen. The BlackBerry Torch also has a new operating system, the BlackBerry 6, and Web browser, a move aimed at boosting market share as RIM battles the likes of the iPhone from Apple Inc. and other new smart phones on the market.

"Keys for the stock will be how well the BB6 OS shows (innovation, differentiation, form factor, etc.) and launch timing/pricing of the device," UBS analysts Phillip Huang and Maynard Um said before RIM's showing in New York. "[Management]has placed a high degree of importance on its BB6 OS as the 'next driver' of RIM's business, reflecting the longer-term importance of the announcement. Shorter term, launch timing could impact the quarter with an imminent launch helping to drive [second quarter of the 2011 fiscal year]results toward the high end of guidance ($.4-billion to $4.6-billion in revenues and 11.6-million to 12.1 million units) and vice versa."

Today's announcement, made with AT&T Inc. in the United States, comes after a weekend flurry of controversy surrounding security concerns in several countries, notably the threat by the United Arab Emirates to shut down BlackBerry service in October if RIM doesn't take the measures needed to allow authorities to monitor communications.

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