Canada eyes budget surplus in 3 years, big policy reforms

Changes to pensions, immigration, regulatory reviews, R&D
||Last Updated: 03/29/2012

OTTAWA (Reuters) – The federal government has opted for the slow road to a balanced budget and kept spending cuts relatively mild in a cautious budget that was, nonetheless, packed with policy reforms that ranged from raising the retirement age to fast-tracking approvals for big oil and mining projects.

The Conservative government maintained a promise made last year to eliminate its budget deficit, small by international standards at 1.5 per cent of gross domestic product, by the 2015-16 fiscal year after adjusting for promised spending cuts.

Analysts said Ottawa could easily close the budget gap one year earlier due to a better-than-expected fiscal performance this year, an improved economic outlook and a contingency cushion built into the numbers.

The budget deficit for the current year ending March 31 is now seen at $24.9 billion ($24.9 billion), almost $6 billion lower than estimated in November. That gap will narrow to $21.1 billion in 2012-13 and continue shrinking until a surplus of $3.4 billion is reached in 2015-16, according to the government's estimates.

In reality, analysts see an underlying surplus as early as 2014-15 if you strip away the government's $3 billion downward adjustment for risk to revenues.

"If there are surprises, it's probably to the good side, not the bad side," said Craig Wright, chief economist at the Royal Bank of Canada.

"When you look at fiscal projections, what you like to see is conservative economic assumptions and we've got those. There is a good amount of prudence in the economic projections and there is that adjustment for risk," he said.

The budget was Prime Minister Stephen Harper's first opportunity to present a major new plan since his Conservatives won a decisive majority in a May 2011 election following five years of unstable minority rule. Because of the majority, its passage this time is assured.

Harper has billed it as a "transformational" plan for long-term prosperity because of sweeping and controversial changes to pensions, immigration, environmental regulations and innovation.

Balanced budgets are a source of national pride in Canada after a painful austerity exercise in the mid-1990s led to an 11-year string of surpluses. Harper reluctantly oversaw the country's decline into deficit due partly to a stimulus program during the 2008-09 recession and partly to earlier tax cuts, but vowed to deliver a fiscal turnaround once the recovery was underway.

Austerity ‘light’

Canada's latest version of austerity, however, pales in comparison to the United Kingdom or others and analysts said minor deviations from the projections would have little or no impact on the country's "AAA" rating and appeal to investors.

"We're realizing that, quite frankly, some of our Western traditional economic allies and other allies will not have economies of great strength in all likelihood in the next while, and we want to be in the next league," Finance Minister Jim Flaherty told reporters ahead of his budget speech.

"We want to be with the emerging economies, we want to be with the economies of South America that are growing, and we're in a position in this country to get there."

The debt-to-GDP ratio is set to decline to 28.5 per cent by 2016-17, roughly in line with pre-recession levels, from 33.9 per cent this year.

"Overall, the boat is still moving in the same direction. It could have been more aggressive on the spending side — or they could spend less to bring the zero deficit a year earlier, but they didn't go that route," said Sebastian Lavoie, assistant chief economist at Laurentian Bank. "They wanted to buy some time, stay the course for maybe another year until we move closer to an election year. Some market participants will like their prudence."

The battle for public opinion in the run-up to the budget centred on the government's commitment to find savings across the federal bureaucracy of between $4 billion and $8 billion per year, or roughly five per cent to 10 per cent of discretionary spending.

Again, Ottawa avoided the most draconian route and booked savings of $5.2 billion annually by 2014-15, or 6.9 per cent of an envelope of $75.3 billion, which excludes transfer payments to other levels of government and to individuals.

Still, the move is bound to anger labour unions and the opposition as it will result in 19,200 job losses over three years, or about five per cent of total federal employment. Of those, about 7,000 will occur through attrition, the government said.

Retirement age

On the policy front, the government said it would follow in the footsteps of countries such as Australia, France, Germany and the United States by raising the age of eligibility for Old Age Security, a key pillar of the country's pension program. The increase to 67 years from 65 will be gradually phased in starting in 2023, with full implementation by 2029.

"It's a very reasonable transition period," said Albert Baker, partner at Deloitte. "All countries are living through the baby boomer effect and so the cost of that program is going to triple, so countries around the world are taking the necessary steps."

Immigration policy, an emotionally charged topic in a country that has traditionally welcomed newcomers, will also be revamped to cut a huge backlog of applications from skilled workers and ensure newcomers fill the country's current labour needs.

The right-of-centre government, which has a strong voter base in oil-rich Alberta, said it would overhaul the regulatory review process for oil pipelines, large mines and other natural resource projects. It aims to impose firm time limits on regulatory hearings, ensure each project is reviewed only once and cut the number of environmental assessments.

Finally, it seeks to reverse a sorry record on high-tech innovation by reshaping and simplifying its support programs for business research and development.

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