Canada Budget Offers Economic Stimulus

UNCLAS SECTION 01 OF 02 OTTAWA 000080 STATE FOR E, EB/DCT, WHA/EX, WHA/CAN STATE PASS USTR (SULLIVAN) COMMERCE FOR ITA/MAC (WORD) TREASURY FOR IA (NEPHEW) SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON EFIN ETRD EINV EIND PREL PGOV CA SUBJECT: Canada Budget Offers Economic Stimulus Refs: (A) OTTAWA 70 (B) OTTAWA 78 SENSTIVE BUT UNCLASSIFIED. PLEASE PROTECT ACCORDINGLY ¶1. (SBU) Summary: Although battered by economic shocks, Canada is well positioned for economic recovery if and when commodity prices rise and U.S. demand returns. To best position Canada for eventual recovery, the Conservative government's January 27 budget provides massive (by Canadian standards) fiscal stimulus measures and immediate relief for those hardest hit by the recession. The budget also went some way to at least paper over the political divisions that threatened the minority Conservative government in December (ref b). End Summary Strategy for Coping with the Global Economic Crisis -------------- -------------- ¶2. (SBU) In its January 26 Throne Speech, the government announced that its strategy for crisis recovery would be to balance short-term deficit spending with long-term growth measures that would avoid lasting deficits. (Comment: Given the Canadian economy's relatively small size and outward orientation, government stimulus packages can do little to promote recovery, other than make marginal improvements until export demand returns (ref a). Since the United States absorbs more than 80 percent of Canadian goods exports, Canada's economic prospects are directly tied to recovery in the United States. End comment.) Budget Contents -------------- ¶3. (U) The Harper budget provides approximately C$40 billion in stimulus over two years focused on infrastructure, tax breaks and access to credit, support for troubled industries and targeted assistance for vulnerable groups and individuals. There are also some key measures such as middle class tax breaks and renovation credits that should have broad voter appeal. The government predicts these actions will create 190,000 new jobs. ¶4. (U) On infrastructure, the federal government has promised C$14 billion in new spending (with a further C$9 billion from provinces and a C$4 billion loan fund for low-income regions). ¶5. (U) Modest but permanent tax breaks are offered to Canadians earning less than C$80,000 per year. Corporate taxes are being reduced from 19 to 15 percent and more small businesses will be eligible for preferential tax treatment. ¶6. (U) Commercial credit will be expanded through liquidity injections to government lending agencies including the Export Development Corporation and the Business Development Bank which will be made available as soft credit to Canadian enterprises. Other credit measures include re-visiting the possibility of allowing chartered banks to offer automotive leases and increased federal oversight of credit card grace periods and consumer disclosure requirements. ¶7. (U) Under the budget, targeted assistance will be available to communities with sectors which are specifically affected by the downturn (e.g., forestry, fishing) and one-industry towns. The government also focused on the unemployed, the elderly, the disabled, and First Nations communities for special assistance in skills, housing, and income support. Deficit and recovery projections -------------- ¶8. (SBU) The government projects that Canada's deficit will hit C$64 billion in two years (roughly 2.5 percent of GDP),with federal Qbillion in two years (roughly 2.5 percent of GDP),with federal budget going into deficit for the first time in twelve years. The last time the budget was in deficit in 1997, debt charges consumed 20 cents of every federal tax dollar. Today, the rate is to 13 cents. The Bank of Canada predicts that Canada come out of recession within a year, but Finance Minister Jim Flaherty admits that his budget is based on more pessimistic growth projections than OTTAWA 00000080 002 OF 002 those used by the Bank. ¶9. (SBU) Although the government has been accused of moving too slowly with recovery plans, the volatility of economic conditions has made it difficult to see exactly where the economy is headed. The Ministry of Finance now predicts a 0.8 percent contraction of the economy in 2009 even though growth of 1.1 percent had been forecast two months ago in the government's November Economic and Fiscal Update. For 2010, the government is still predicting solid growth of 2.4 percent, down 0.2 percentage points from the previous forecast. Trade-distorting effects of stimulus measures -------------- ¶10. (U) Canadian stimulus measures are not expected to violate any NAFTA commitments or WTO rules on subsidies since they are not tied to exports nor contain local content requirements. Any measures that are specific to a sector (such as autos and forestry) may qualify as non-actionable spending on research, aid to disadvantaged communities, or environmental protection. Comment: -------------- ¶11. (SBU) While Canada is counting on a return of U.S. demand, Canada's economic recovery could be bumpy. U.S. firms that serve as the hub for many Canadian business activities might not survive the economic crisis. Also, integrated U.S.-Canada supply chains could be disrupted by national protectionism measures adopted during the economic crisis. This uncertainty (and the fear of needless deficit spending) helps explain why the government has kept a prudent line on spending (2.5 percent over two years in recognition of their G20 commitment with no new spending guaranteed). End comment