June 1, 2009 / 4:27 PM / 8 years ago

Canada says GM aid biggest part of deficit increase

TORONTO (Reuters) - Canada's aid to General Motors Corp will constitute the biggest part of a huge increase in the federal deficit this year, but failure to help GM would have been catastrophic, Prime Minister Stephen Harper said on Monday.

Canada and the Ontario provincial government are lending $9.5 billion to GM, and taking 11.7 percent of the common shares of the new company.

"Today's announcement is a regrettable but necessary step to protect the Canadian economy during the worst global recession in half a century," Harper told a news conference. "Indeed, these actions will account for the greatest part of the increase of this year's projected federal deficit."

The federal government is taking a two-thirds share of the combined Canadian-Ontario contribution, giving it a hit of $6.33 billion, which Harper converted into Canadian dollars at C$7 billion.

Part of the overall total will be a federal-provincial loan of $1.3 billion, along with $400 million for which the two levels of government are receiving preferred shares.

Harper said the government is booking the entire investment in shares as a cost that goes toward its forecast C$50 billion deficit for 2009-10. His government was roundly criticized last week when it raised the deficit estimate from C$34 billion.

"We are counting on significant return on the debt portion, but on the equity portion we're assuming upfront, we will be assuming that that is a 100 percent cost," he said.

He said the government would sell its shares when the price is right -- officials said this would be done within eight years of GM's initial public share offering in 2010 -- but that the government was not factoring this into the budget plans.

Because it is booked as a one-time cost, the auto aid will not boost the deficit in future years.

Canada and the United States have also come to the rescue of Chrysler, and Harper said that if GM and Chrysler had failed, or if all the production had been pulled back to the United States, it would have meant six-figure job losses in Canada within months.

"If you look at the economic situation we're in, if you look at the fallout of the Lehman situation in the United States, my judgment as an economist is to allow that kind of a failure, that kind of a massive .... job loss at this point in our economy would be very, very risky," he said.

Canadian officials said GM had committed itself to spend C$2.2 billion on capital projects in Canada through 2016, and C$1 billion on research and development.

The government said GM has agreed to maintain 19 percent of its Canada-U.S. production (16 percent of its NAFTA production) in Canada in exchange for the aid, the officials said.

GM pledged to start producing a new engine module at its St. Catharines, Ontario, plant in 2014 as part of the deal, government officials said. A GM statement said this plant would have flexible transmission production with the launch of manufacturing of a six-speed front-wheel drive transmission.

The GM statement said it would launch five new vehicles, including hybrids, at plants in Oshawa, Ontario, and Ingersoll, Ontario, and anticipated no further plant closures in Canada.

($1=$1.09 Canadian)

Additional reporting by Nina Lex in Toronto and Randall Palmer, David Ljunggren and Louise Egan in Ottawa; editing by Peter Galloway

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