CANADA'S FEDERAL BUDGET: PM CHRETIEN'S LEGACY --

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E.O. 12958: N/A
TAGS: EFIN ECON ETRD CA
SUBJECT: CANADA'S FEDERAL BUDGET: PM CHRETIEN'S LEGACY --
"JEAN BILLIONAIRE"!

REF: (A) Ottawa 2711 (B) Ottawa 3113


1. (U) Sensitive but unclassified, please protect
accordingly. Not for Internet distribution.

Summary
--------------


2. (SBU) Dubbed Prime Minister Jean Chretien's "Legacy"
by Canadian analysts, the budget presented on February 18
is the largest fiscal stimulus package since the Trudeau
era 20 years ago, and the second largest spending program
in 40 years. The "Jean Billionaire Budget", with C$14.3
billion this year (FY03-04),and C$38 billion over the
next five years, includes something for almost everyone
but few surprises. (Note: using an exchange rate of 1C$
= 66 UScents, new spending FY2003-2004 would be US$9.4
billion and over five years, US$25.1 billion.) Despite
the 11.5% increase in spending (four times the rate of
inflation) this is the GOC's sixth consecutive balanced
budget and does provide for debt reduction.


3. (U) Finance Minister John Manley was able to use his
first budget as a launching pad in his bid to succeed
Prime Minister Chretien. (Chretien has announced that he
will step down in February 2004.) In his speech to
Parliament, Manley stressed benefits for children, the
homeless and First Nations (aboriginal) communities,
saying "you can't have a world of peace unless you
address the world of need." His speech emphasized
commitment to making Canada a knowledge economy, and
expressed the wish that the maple leaf, wherever it is
seen in the world, will represent hope, compassion and
determination. Manley also promised a thorough review of
government programs and expects to reallocate C$1 billion
a year to higher priority programs on a continuing basis.

The Lion's Share for Health Care: 63%
--------------

4. (SBU) As indicated in the Speech from the Throne (ref
A) and called for in the November 2002 Romanow Report,
health care spending takes the lion's share of the
budget. Spending is slated to increase by C$34.8 billion
over the next five years - C$8.96 billion this year alone
- for 63 percent of total new spending of C$14.3 billion
this fiscal year. Defense spending, in contrast,
receives 0.8% of this year's spending, for a total of
C$1.1 billion. Although the increase in defense spending
is less than some had hoped, it reverses years of
significant declines and is a big step in the right
direction for Canada's military. End Summary.


5. (SBU) Comment: As in past years, the GOC
intentionally leaked many budget proposals. Financial
markets had discounted the GOC's spending, and the
Canadian dollar remained stable. Some analysts contend
that the markets will ignore this budget because it can
be viewed as "just a one-year change in policy" until the
end of Chretien's tenure. With the generous spending to
support the Prime Minister's swan song "wish list,"
Finance Minister Manley was able maintain Canada's image
of fiscal prudence only in comparison to the fiscal
deterioration of the rest of the G7. End Comment.

Budget Overview: Risks are from the U.S.
--------------


6. (U) Economic Assumptions:
-- 3.2% real GDP growth in 2003 (highest in the G7)
-- 3.5% real GDP growth in 2004
-- Risks include uncertain economic recovery in the U.S.
and geopolitical concerns, especially possible war in
Iraq.


7. (U) Fiscal Projections: The Sun Will Keep Shining
-------------- --------------

-- Canada is the only G7 country to record a surplus in
FY2000-2001 (C$15B) and FY2001-2002 (C$8.2B). The
Liberal Party is committed to "balanced budgets or
beyond" from this year (FY2002-2003) through FY2004-2005,
a promise that has traditionally resulted in surpluses.

-- Debt reduction payments of C$47.6 billion in FY2001-
2002 lowered the federal debt-to-GDP ratio to 46.5%, from
51.8% in the previous year. (The debt-to-GDP ratio is
projected to drop to 40% by FY2004-2005.)

-- The GOC's Contingency Reserve will remain at $3
billion, while "Economic Prudence" will rise to C$1
billion in this fiscal year and C$2 billion next fiscal
year, from zero the past two years. Note: Economic
Prudence is a reserve set aside for unforeseen factors
that could undermine economic performance, such as global
political and economic uncertainties. No funds were
needed for "Economic Prudence" in the previous two fiscal
years because the Canadian economy performed above
expectations. End note.


8. (U) Spending Initiatives: Something For Everyone
-------------- --------------

Total new spending of C$25 billion over three years
covers most sectors, although some, such as health care,
have five-year spending commitments or longer.

Health Care and Other Social Spending
--------------

-- The C$34.8 billion committed for increased spending in
health care over five years includes:

-- A five-year C$16 billion Health Reform Fund for the
provinces and territories to target primary health care,
home care and catastrophic drug coverage.

-- A C$9.5 billion increase in cash transfers to the
provinces and territories over five years.

-- An immediate investment of C$2.5 billion through the
Canada Health and Social Transfer supplement (with
details left to the discretion of the respective
provinces).

-- C$5.5 billion in health reform initiatives, including
diagnostic/medical equipment and a six-week compassionate
leave benefit under employment insurance.

-- C$1.3 billion to support First Nations' health
programs.

-- C$5.6 billion in social spending for the homeless,
childcare, and affordable housing.

Defense, Security, Foreign Aid: Reversing decline
-------------- --------------

-- An increase of C$800 million for Canadian military
capabilities in each of the next three years. (Note: in
his speech, the FinMin said "every year," without
specifying a time limit. End note.)

-- C$170 million this fiscal year for urgent capital
requirements, maintenance of capital equipment, spare
parts, the purchase of new capital equipment and other
expenses.

-- C$100 million to support the military commitment in
Afghanistan ("Operation Apollo").

-- C$75 million in each of the next two years for the
Security Contingency Reserve, to enable the GOC to
respond to unforeseen security needs, including border
security.

-- Nearly C$500 million annually in foreign aid (an 8%
increase),for a total of C$1.4 billion over the next
three fiscal years.

Sustainable Development (including Kyoto implementation):
Still Vague
--------------

The budget allocates C$3 billion to environmental
initiatives, including:

-- C$2 billion over five years to implement the Kyoto
Accord;

-- C$1 billion for other environmental measures.

Note: There are still no details on how the Kyoto
implementation funds will be spent. End note

Refining the Tax System
--------------
Manley prefaced his comments on tax changes by saying
this budget supports improved corporate governance and
regulation. The budget will:

-- Reduce the corporate tax rate to 21% from 28% over the
next five years while making other changes to the
corporate tax structure.

-- Reduce the tax on resource income to 21% over five
years.

-- Raise RRSP and RRP (pension plan) contribution limits
to C$18,000 over four years, and index the new limits.

-- Eliminate the federal capital tax over the next five
years, with medium-sized businesses benefiting first.
(Initially, the capital threshold at which the tax
applies will be raised from C$10 million to C$50 million
effective in January 2004. As of January 2004, medium-
sized businesses under the C$50 million threshold will no
longer have to pay the tax. Second, the rate of the tax
will be reduced in stages over a period of five years so
that by 2008, the tax will be completely eliminated. No
changes are proposed to the special capital tax on large
financial institutions.)

-- Reduce the airport security tax from C$24 to C$14 per
round trip after March 1.

-- Increase the film and video production services tax
credit from 11% to 16% of qualified Canadian labor
expenditures. The GOC will to continue to consult with
the Canadian film industry to develop criteria for a
streamlined mechanism for delivering the tax credit,
which in turn could provide a refundable tax credit of
25% of qualified labor expenditures for Canadian film or
video productions.

Other items
--------------
-- C$2 billion has been earmarked for "innovation and
skills," such as research grants and scholarships.
Manley highlighted in his speech that this year a greater
proportion of scholarships will support social science
scholars. He also stressed the allocation of C$114.5
million over 5 years to support dual language
proficiency.

-- C$5.2 billion over six years in farm aid
Cellucci