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RPT-UPDATE 2-Canada unveils investment tax break, says budget gap smaller than forecast

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OTTAWA, Nov 21 (Reuters) - Canada will allow businesses to write off additional capital investments to make them more competitive at a time when the United States is aggressively cutting taxes, Finance Minister Bill Morneau said on Wednesday.

But Morneau, speaking as he unveiled a budget update that forecast a slightly smaller-than-predicted deficit for 2018-19, said Ottawa would not be slashing taxes to match aggressive moves by Washington.

“If we were to do that, it would add tens of billions in new debt,” he told the House of Commons.

The move could disappoint business groups that said Ottawa needed to do much more to match the U.S. cuts. Morneau acknowledged their concern and said it would be neither rational nor responsible to do nothing.

The federal government will allow businesses to immediately write off for tax purposes the full cost of machinery and equipment used in the manufacturing and processing of goods. The measure covers purchases made on or after Wednesday and expires in 2027.

Morneau delivered his update six weeks after the United States, Canada and Mexico calmed nervous markets by agreeing on a continental trade deal to replace the North American Free Trade Agreement.

“We have had some reduction in trade uncertainty ... (and) with these changes, you are adding another layer of incentive for businesses to invest,” said Josh Nye, a senior economist at the Royal Bank of Canada.

The Canadian dollar strengthened slightly to C$1.3229 to the U.S. dollar, or 75.59 U.S. cents, which was its high for the day.

The budget update projected a C$18.1 billion ($13.7 billion) deficit for 2018-19, which was smaller than a revised C$18.8 billion projection made in the February budget. The fiscal year ends on March 31.

Ottawa is also introducing an accelerated capital cost allowance for all businesses and allowing some clean energy equipment to be eligible for an immediate write-off.

The combined effect of the measures means the average overall tax rate in Canada on new business investment will fall to 13.8 percent from 17.0 percent, the lowest level in the Group of Seven large industrialized nations.

“This incentive will encourage more businesses to invest in assets that will help drive business growth over the long term,” Morneau told legislators.

Morneau, who told reporters the economy was doing very well, made no mention of when the budget would be balanced - a feat the Liberals promised to pull off within five years when they took power in late 2015.

His figures showed the deficits from fiscal 2019-20 through 2022-23 would be slightly higher than Morneau had forecast in his February budget.

Andrew Scheer, leader of the official opposition Conservative Party, said the continuing deficits meant taxes would have to go up.

“The Trudeau Liberals are robbing from our children and it’s just wrong,” he said on Twitter. Opinion polls show the Conservatives trailing Prime Minister Justin Trudeau’s Liberals in an election due in October 2019. ($1 = 1.3225 Canadian dollars) (Additional reporting by Fergal Smith in Toronto; editing by Peter Cooney)