Flaherty’s ‘tough’ budget may still be a year away – The Globe and Mail

Derek Decloet

Flaherty’s ‘tough’ budget may still be a year away

Finance Minister Jim Flaherty

Finance Minister Jim Flaherty Reuters

Jim Flaherty will never be Bay Street’s favourite Finance Minister. But never let it be said that the author of the largest budget in Canadian history is deaf to the mood of business.

Derek Decloet

For months, Corporate Canada has been in hiding, still absorbing the shock of the most frightening economic downturn in at least a quarter-century. Deals are few; many CEOs are sitting on their hands, waiting for firm signals of recovery. And Thursday’s $280-billion federal budget, Mr. Flaherty’s fifth, picked up precisely the same tone. Like everyone else, he’s biding his time before he makes any hard decisions.

The most striking thing about Budget 2010 is its lack of 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 Thursday. “This is probably the smallest budget in terms of new spending in about 10 years.”

“Tough”? Not really. When you are planning to spend $94-billion more than you’re taking in over three years, you’re not exactly straining your arms to swing the axe. Yes, the growth in program spending this year is modest, about $11-billion. But that’s because last year’s spending was 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.

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Mr. Flaherty’s road map to the balanced budget contemplates few serious cuts at all, in fact. 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 the big-ticket items – transfers to provinces, money for seniors and children, unemployment benefits – are untouched. That’s about half the budget right there.

So it’s still 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 $82-billion increase in revenue and a $30-billion rise in spending, that’s how.

This 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 fiscal record.

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 6½ per cent by 2015; and a moderate rise in interest rates.

Taken individually, none of these assumptions is outrageous. But the picture is that 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 a lot of 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 United States. If America stumbles, Mr. Flaherty may have no choice next year but to spread a little more pain, and table a truly “tough” budget.

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One Response to Flaherty’s ‘tough’ budget may still be a year away – The Globe and Mail

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