MANITOBA BUDGET "STEADY AS SHE GOES" AGAIN

UNCLAS SECTION 01 OF 02 OTTAWA 001180

SIPDIS

SENSITIVE

DEPT FOR EB/IFD, WHA/CAN AND WHA/EPSC
TREASURY FOR OASIA/IMI - HARLOW, MATHIEU
USDOC FOR 4320/MAC/ON/OIA/JBENDER
CALGARY PASS TO WINNIPEG

E.O. 12958: N/A
TAGS: EFIN ECON ETRD CA
SUBJECT: MANITOBA BUDGET "STEADY AS SHE GOES" AGAIN


1. Summary: On the eve of a provincial election this spring,
Manitoba's left-of-center New Democratic Party (NDP) government
delivered a cautious budget on April 22, laying out its fiscal
plan for the upcoming year. As in previous NDP budgets, this
years' rendition features very modest tax-cuts for middle-income
earners and devotes more money to health care. Based on an
anticipated real growth rate of 3.2 percent, Finance Minister
Greg Selinger projects the NDP's fourth consecutive balanced
budget since taking power in 1999. Successive Manitoba
Governments have brought down balanced budgets each year since

1995.


2. The NDP continued the tradition they began in last year's
budget of raiding the revenues of the publicly owned electric
utility, Manitoba Hydro, for C$52 million to help balance the
books. In total, the GOM will collect approximately C$365
million in fees, "dividends" and assorted charges from Manitoba
Hydro in 2003-4. A C$48 million draw on the province's fiscal
stabilization fund will leave only C$145 million in the fund,
compared to C$264 million when the NDP took power in 1999. The
province expects to spend C$7.256 billion in 2003-4 (an increase
of 4.7 percent over the previous year),with revenues increasing
by 5.4 percent. End summary.


Manitoba Tax Rates Uncompetitive
--------------


3. Manitoba's meager - and largely symbolic - tax reductions,
while welcome, have not kept pace with the more rapid reductions
in most Canadian jurisdictions, feeding fears in the Manitoba
business community that Manitoba is no longer competitive with
other Canadian provinces, much less bordering states. Even after
the cuts, Manitoba's personal and business tax levels remain
among the highest in Canada. For example, Manitoba's personal
income tax rates at all levels of income are higher than the
rates paid by residents of six of Canada's ten provinces,
including Ontario, Alberta, and British Columbia. At the same
time, Manitoba's general corporate income tax rate is the second
highest in the country. Provincial comparisons aside, when
Manitobans expressed concerns that their tax rates put them at a
competitive disadvantage with their U.S. counterparts, the
Provincial Finance Minister responded that Manitoba retains a
cost of living advantage over U.S. jurisdictions because higher
payroll taxes and healthcare costs are not included in the U.S.
figures. Manitoba also boasts relatively lower prices for
electricity than neighboring provinces and states.

A Little Here, a Little There.
--------------


4. In a budget devoid of major initiatives or incentives,
funding Manitoba's publicly-funded healthcare system clearly
remains a priority for the NDP. Funding in 2003-4 will increase
by 5.7 percent to just over C$3 billion, or 41 percent of the
province's total budget. Most of the new money for health care
is coming from the federal government.


5. Manitoba businesses will be offered a new tax credit to
invest in equipment or technology that reduces their own energy
consumption. The measure, which the GOM predicts will cost C$1
million, is meant to leave more hydroelectricity on the grid for
export, mostly to U.S. customers. The GOM offered no estimate of
the amount of energy that will be saved by the measure. As
previously announced, the corporate tax will fall by a further
0.5 percent in 2004 to 15.5 percent.


6. Other spending decisions announced in the budget include a
C$20/per month increase in welfare rates for single recipients
and people with disabilities, as well as C$1 million to find new
markets and products to shore up the beleaguered Port of
Churchill.

Local Reaction: Underwhelmed
--------------


7. Business and taxpayers groups have roundly condemned the GOM
for failing to provide any meaningful tax relief, and for the
NDP's failure to keep Manitoba competitive with neighboring
jurisdictions. The President of the Winnipeg Chamber, Robert
Kreis, said "It is a very good day for our competitor provinces
and our competitor businesses outside the province." Jim Carr,
president of the Business Council of Manitoba called it
".typically cautious without much risk taking, and there isn't
much dare-devilling going on. It tries to straddle the middle,
where most of the voters are. We would have liked to have seen
more aggressive cuts to personal taxation."


8. The NDP's traditional allies on the left were slightly more
restrained in their criticism of the budget, with Sid Frankel of
the Social Council of Winnipeg applauding the move to inject $6
million into child care, but said the NDP is going to have to tax
upper-income earners more if it plans to keep funding social
programs, adding "Government has really put itself in a situation
where it's not taxing those who are really benefiting from the
economy." Gaile Whelan Enns, Manitoba director of the Canadian
Nature Federation's Wildland Campaign, praised the NDP's new tax
credit for businesses to reduce energy consumption, but panned
the government for only funding the creation of one new
provincial park while 138 areas in Manitoba need protection.


9. Reaction in Winnipeg's major newspapers has also been
unfavorable. The centrist Winnipeg Free Press said that "if the
middle class can be bought off with an average tax cut 20 months
down the road of $155, what does that say about Manitoba?" It
further lamented "that there does not seem to be an effective
opposition with a vision more compelling to voters than the
promise of a pitiful $155 saving on taxes eventually." The right
of center Winnipeg Sun described the budget as having "far too
many empty carbohydrates and not enough energizing protein."

Comment
--------------


10. This year's budget is consistent with the NDP's established
practice in the last four budgets of being cautious to a fault,
increasing funding to health care, and offering small, targeted
measures on a multitude of issues, and continuing with the most
modest tax cuts of any province in Canada. They have outlined
the fiscal path they will use in the upcoming election campaign,
and will be quite content to campaign on a balanced budget, a
strong economy and the lowest unemployment rate in Canada at 5.2
percent. The opposition parties - especially the Progressive
Conservatives - will likely focus their attacks during the
campaign on Manitoba's uncompetitive tax environment and how it
is preventing investment and growth as well as hastening the loss
of the province's best and brightest to greener pastures
elsewhere.

Cellucci