Federal government unveils budget

Ottawa predicts return to surplus in 2015 — but all 3 opposition parties say they won't support budget

(Reuters) — Canada's ruling Conservatives pledged on Tuesday to slice the budget deficit by a quarter this year and return to surplus in 2015, while offering a host of treats to opposition parties in the hope of avoiding an election.

But a federal election is all but inevitable after all three opposition parties said they could not support the budget presented by the minority Conservative government.

The government's fate appeared to be sealed after Jack Layton, leader of the opposition New Democratic Party (NDP), said measures to help seniors and provide more for doctors did not go far enough.

The only way to avoid an election would appear to be if enough opposition members of Parliament stayed away from the budget debate for the government have the votes to force the document through.

The three opposition parties have ramped up attacks on the government of Prime Minister Stephen Harper in recent weeks over ethical breaches, fueling speculation they would seek to topple him as early as this week in a confidence vote.

"To secure our recovery from the global recession, Canada needs a principled, stable government. Now is not the time for instability," Finance Minister Jim Flaherty said in his budget speech.

Strong economic growth is helping narrow the budget gap slightly more in the next five years than the government predicted last October, but Flaherty embedded extra cautious economic outlook into his fiscal plan and left intact his prediction of a return to a small surplus in 2015-16.

"From an economics policy perspective, this budget I think is pretty much what people were looking for going into it, but it does seem to be heavily tilted towards a political budget as well," said Craig Wright, chief economist at Royal Bank of Canada.

Layton had conditioned his support for Harper on more help for poor seniors, tax relief on home heating bills, a beefed-up state pension plan and more family doctors.

Flaherty told reporters he had tried to take into account the many demands made of him but added: "The job of the government is not to appease opposition parties."

The budget items that most obviously court the NDP were more income support for low-income seniors at a cost of $300 million a year, renewal of a program that reimburses Canadians who make energy-efficient home renovations for $400 million, and student loan forgiveness for doctors and nurses who work in rural Canada. It also proposes a tax credit for people who miss work to care for elderly family members, which will cost $200 million over two years.

"I am surprised by the sheer volume of measures, mostly fairly small but they do add up next year to $2.3 billion, so it's significant," said Don Drummond, economic adviser to Toronto-Dominion Bank and a former finance official.

"They address in a reduced fashion a number of things the NDP were looking at and in an even more reduced fashion some of the Liberals' demands," he said.

Businesses got some help too, in the form of a two-year extension of the accelerated capital cost allowance for investment in manufacturing and equipment and a tax credit for small businesses to hire new workers.

Closing the gap

The government opted to err on the side of caution in its economic and fiscal projections, lowering the private sector forecasts of gross domestic product growth used as budget assumptions, citing Europe's debt woes and the catastrophic earthquake and nuclear disaster in Japan.

After a decade of surpluses and boasting the strongest fiscal reputation in the G7, Canada fell into deficit during the global financial crisis. Flaherty has vowed to keep cutting taxes and rely on the withdrawal of a stimulus program and spending restraint to balance the books in the medium term.

The budget foresees the federal deficit narrowing in the 2011-12 fiscal year to $29.6 billion, or 1.7 per cent of GDP, compared with $29.8 billion in its previous forecast in October, down more than 25 per cent from an estimated $40.5 billion gap in 2010-11 period ending March 31.

The deficits in subsequent years are slightly smaller as well, returning to a surplus of $4.2 billion, or 0.2 per cent of GDP, in 2015-16.

Ottawa sees the economy growing 2.9 per cent this year and 2.8 per cent next year.

The government, which has already cut spending through a strategic review of programs, said it hopes to squeeze out an additional $11 billion in savings between now and 2016.

Ottawa also built in a cushion against future financial market crises into its debt management strategy, proposing to borrow an additional $35 billion for a "prudential liquidity" buffer in case of disruptions in funding markets.

(Additional reporting by Louise Egan, David Ljunggren, Howaida Sorour and Chandra Ramarathnam.)

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