Manufacturers say budget comes up short

OTTAWA (Reuters) - Canada’s budget offered some financial help for the country’s struggling manufacturing sector on Tuesday, but industry groups said it would not be enough to offset the impact of a strong domestic currency, a slumping U.S. economy and low-cost global competition.

Introducing his 2008-09 budget, Canadian Finance Minister Jim Flaherty said he would devote C$250 million ($255 million) over five years to research and development by the automotive sector.

He will also extend a plan under which manufacturers can accelerate the way they deduct for tax purposes the cost of a capital asset.

Flaherty’s extension of the already two-year-old temporary plan for a 50 percent, straight-line accelerated capital cost allowance (CCA) is aimed as an incentive for firms to invest in new equipment.

“This will provide the manufacturing and processing sector with an additional C$1 billion in tax relief,” he said in his budget speech to the House of Commons.

Industry groups, however, said the one-year extension of the 50 percent rate would not give capital-intensive industries the time and funds needed to plan and execute the big investments they need to compete internationally.

“It’s really a grab bag of goodies, some loose pocket change being thrown to the manufacturers,” Jayson Meyers, president of the Canadian Manufacturers and Exporters Association, told Reuters.


Flaherty said the C$250 million for the auto industry, Canada’s largest manufacturing sector, would help it develop vehicles that are more fuel-efficient and pollute less.

“This will help preserve the environment. It will also help preserve and create high-quality jobs,” he said.

But Jim Stanford, an economist at the Canadian Auto Workers union, said the auto fund would not help workers who are losing their jobs as the industry cuts back.

“We would have preferred to see Mr Flaherty take a billion dollars out of that whopping 2007 surplus and create a real auto investment fund to match Ontario’s billion-dollar fund,” Stanford said.

Other export-oriented sectors hurt by the U.S. economic slowdown have also been looking for relief from Ottawa.

Canada’s forest products industry, which has lost some 33,000 jobs, or 10 percent of its workforce, since 2003, was looking for more in Tuesday’s budget.

Marta Morgan, vice-president of trade and competitiveness at the Forest Products Association of Canada, said the sector is in its worst crisis in 30 years, hurt by a strong Canadian dollar and slumping prices stemming from the U.S. housing market collapse.

Like other manufacturers, forestry companies wanted Flaherty to extend the capital cost allowance program by five years rather than one year at a time.

“Just given the profound nature of the competitive challenges facing the industry, firms need more time to adjust and to invest than we have been given in this budget,” Morgan said.

But not all observers think extending the capital cost plan by one year is a meager measure.

Pascal Gauthier, an economist at TD Bank Financial Group, said international trade rules prevent Canada from bailing out industries with direct cash infusions, and rather than giving special treatment to one sector, it needs to develop a strategy to improve the country’s overall cost competitiveness.

“It would make sense for the government to treat all industries symmetrically. Let the markets determine where the jobs will be created,” Gauthier said.

Canada’s service industry, for example, is creating the bulk of the new jobs, but not getting much of a break in the budget, he added.

($1=$0.98 Canadian)

Editing by Randall Palmer and Rob Wilson