WRAPUP 3-Canada vows balanced budget in 2015 without "slash and burn"

Thu Mar 21, 2013 6:08pm EDT

* Deficit to be eliminated in 2015/16 as promised

* Revenue gap to be offset by cuts, bolstered tax-collection

* Spending measures include infrastructure, manufacturing tax credit

By Louise Egan

OTTAWA, March 21 (Reuters) - Canada's 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 committed funds to infrastructure, manufacturing and job training.

The projected deficit in the fiscal year ending March 31 is roughly in line with Ottawa's previous forecast in November, at C$25.9 billion ($25.4 billion). The deficit would be about 1.4 percent of the size of the economy, compared with 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, at C$18.7 billion, or about 1 percent of gross domestic product, compared with a previous estimate of C$16.5 billion. The deficit will shrink to a third of that the following year before returning to a surplus of C$800 million in 2015/16.

Finance Minister Jim Flaherty said he could have cut spending more drastically but opted for "moderate choices" so 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."

Moody's Investors Service confirmed Canada's triple-A bond rating after seeing the budget.

But the political opposition was not impressed, accusing Flaherty of shrinking government at the expense of growth, and of failing to deliver any new spending programs to help the unemployed.

"What we have here is an austerity budget ... You cannot austere your way out of a crisis," said Thomas Mulcair, leader of the main opposition New Democratic Party.

Bob Rae of the third-place Liberals called the budget document "an exercise in rhetoric and propaganda."

The government of Prime Minister Stephen Harper 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 conditionally promised in the 2011 election.

WARNINGS ON AUSTERITY

The budget showed federal government revenues in the coming year would be C$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 saw the plan as feasible, but warned against more extreme austerity of the kind that hammered growth in the United Kingdom and elsewhere if the economy worsens.

"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," said Sebastien Lavoie, assistant chief economist at Laurentian Bank Securities.

To offset the impact of lower revenues, Flaherty promised to decrease discretionary spending over the next five years to 5.5 percent of GDP from 6.7 percent and raise an additional C$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, as requested by the manufacturing sector.

It also provides C$47 billion for infrastructure projects over 10 years, but critics said that represented a cut in near-term funding with the big amounts postponed until 2020.

The budget even includes a populist measure designed to please a hockey-crazed country - reduced tariffs on hockey gear.

Flaherty also plans several regulatory measures targeting banks. These include curbing banks' use of government-backed mortgage insurance, imposing higher capital requirements on systemically important domestic banks and reviewing the regulatory framework to allow smaller banks to enter the domestic market.

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

FAVORABLE LIGHT

The bulk of the measures were on the revenue side, boosting federal intake by C$7.9 billion over five years. This will be done by tightening a myriad of tax loopholes and improving auditing by the Canada Revenue Agency.

Ottawa will also raise tariffs on imports from 72 developing nations like China, South Korea and Brazil, effectively ending their inclusion in Canada's General Preferential Tariff regime.

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 that 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.

There has been much speculation that Flaherty, who suffers from a rare skin condition, might step down after this budget.

Asked whether this was his last budget, Flaherty said he'd like to stay on until balancing the budget. "I'd like to finish what I started."

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