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Flaherty vows balance budget in 2015 without ‘slash and burn’

|Written By Louise Egan, Reuters

The Conservative government pledged on Thursday to close tax loopholes and curb spending to erase its budget deficit in time for the 2015 election, even as it found new cash for infrastructure spending and manufacturers.

Finance Minister Jim Flaherty, left, and Prime Minister Stephen Harper walk to the House of Commons to deliver the budget. (Photo: Blair Gable/Reuters)

The projected deficit in the fiscal year ending March 31 is roughly in line with Ottawa’s previous forecast in November, at $25.9 billion. The deficit would be about 1.4 percent of the size of the economy, compared to about 5.6 percent for the U.S. deficit.

But a big hit to revenues as the economy slows has forced Ottawa to project a bigger-than-expected shortfall in 2013/14 of $18.7 billion compared with a previous estimate of $16.5 billion. The deficit will shrink to a third of that the following year before returning to a surplus of $800 million in 2015/16.

Finance Minister Jim Flaherty said he could have cut spending more drastically but opted for “moderate choices” so that he could stimulate growth and jobs.

“I want our country to be in a very solid fiscal position in case in the future we have another crisis,” Flaherty told reporters.

“History tells us that crises — economic crises, credit crises — are inevitable from time to time. So the best thing we can do for Canada, it seems to me, is to make sure we have a solid foundation,” he said. “We do not need to slash and burn, we can be sensible over time.”

The Conservative government oversaw the country’s slide into deep deficits at the height of the global financial crisis after an 11-year string of surpluses, most of them racked up by the previous Liberal administration.

It is now staking its reputation on balancing the books in time for an October 2015 election campaign, when it could offer new tax breaks it promised in the 2011 election.

The budget showed federal government revenues in the coming year would be $3.4 billion lower than anticipated just four months ago, reflecting the weakest two quarters of economic growth since the 2008-09 recession and a steep discount on Western Canadian oil prices.

Bank economists praised the budget plan as feasible, but said if the economy worsened the government should be wary of more extreme austerity measures like those that have hammered growth in the United Kingdom and elsewhere.

“The fact that 2015 is an election makes it more likely that we’re actually going to see the books balanced,” said Sebastien Lavoie, assistant chief economist at Laurentian Bank Securities.

“If the revenue side materializes as it is projected today, then we’re fine ... Obviously, if we need another round of cuts in a year or two from now, that could be quite different. As we know in Europe, too much austerity can be quite damaging to an economy,” he said.

To offset the impact of lower revenues, Flaherty promised to decrease discretionary spending over the next five years to 5.5 percent of gross domestic product from 6.7 percent and raise an additional $6.8 billion in tax revenue without actually hiking tax rates.

At the same time, he managed to fund key priorities. The budget extends by two years a write-off of investments in machinery and equipment, as requested by the manufacturing sector. It also provides $47 billion for infrastructure spending over 10 years, slightly less than expected.

And it even includes a populist measure designed to please a hockey-crazed country — reduced tariffs on hockey gear.

Flaherty also tightened rules on banks to limit the role government-backed mortgage insurance can play in their portfolios and securitization programs, a bid to avert a U.S.-style credit problems in the future.

Total spending restraint will save $617 million over five years, which is negligible compared to spending cuts made in 2012.

The bulk of the measures were on the revenue side, boosting federal intake by $7.9 billion over five years. This will be done by tightening a myriad of tax loopholes, improving auditing by the Canada Revenue Agency and raising tariffs on imports from some 70 higher-income developing nations.

The ratio of debt to gross domestic product is set to decline to 28.1 percent in 2017/18 from 33.8 percent, which is the lowest in the Group of Seven advanced economies.

“For the most part, very little surprises from a market perspective. If anything, it’s going to continue to show Canada in a pretty favorable light,” said Derek Burleton, deputy chief economist at TD Bank.

Emboldened by the country’s triple-A rating and popularity with foreign investors, the federal government is looking at offering a 40-year bond for the first time.

Flaherty stressed that jobs were his priority for the economy, a top concern of businesses who have complained they cannot find enough skilled workers, particularly in the resources sector in Western Canada.

The budget proposes renegotiating Ottawa’s agreement with provincial governments on how to spend money for training by creating a job grant to better match unemployed workers to skills training as well as support for apprenticeships.

Factbox: Measures to cut tax evasion, loopholes

The federal budget outlined a number of measures designed to save $1 billion over the next five years by cutting tax loopholes and addressing aggressive tax planning. Here are the major steps proposed by the government:

  • Allow the Canada Revenue Agency to pay people with knowledge of major international tax non-compliance a percentage of the tax collected as a result of the information provided.
  • Enhance corporate anti-loss trading rules to address planning that avoids these rules.
  • Extend the application of thin capitalization rules - which limit the amount of Canadian profits that can be distributed to certain non-resident shareholders as deductible interest payments - to Canadian resident trusts and non-resident entities.
  • Ensure that the tax consequences of disposing of a property, such as capital gains tax, cannot be avoided by entering into transactions equivalent to disposing of a property but where taxpayer retains legal ownership.
  • Ensure derivative transactions cannot be used to convert fully taxable ordinary income into capital gains taxed at a lower rate.
  • Eliminate unintended tax benefits relating to leveraged insured annuities and leveraged life insurance arrangements.
  • Introduce new penalties to deter use and sale of software designed to falsify records to evade taxes.
  • Extend reassessment period for reportable tax avoidance transactions and tax shelters where information is not filed properly and on time.
  • Permit the CRA to collect up to 50 percent of amounts in dispute in respect of tax shelter claims that involve a charitable donation.
  • Allow the Minister of National Revenue to withhold payment of tax refunds claimed by businesses which have not provided the necessary information.
  • Require banks to inform the CRA when clients make electronic transfers of more than C$10,000.
  • Require Canadians to give more details about foreign income.

— David Ljunggren


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