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Viewing cable 09OTTAWA70, Canada's Coming Federal Budget and Stimulus Prospects
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Reference ID | Created | Released | Classification | Origin |
---|---|---|---|---|
09OTTAWA70 | 2009-01-26 13:07 | 2011-04-28 00:00 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Ottawa |
VZCZCXRO5047
PP RUEHGA RUEHHA RUEHMT RUEHQU RUEHVC
DE RUEHOT #0070/01 0261307
ZNR UUUUU ZZH
P 261307Z JAN 09
FM AMEMBASSY OTTAWA
TO RUEHC/SECSTATE WASHDC PRIORITY 9019
INFO RHEHAAA/WHITE HOUSE WASHDC
RUEAIIA/CIA WASHDC
RHEHNSC/NSC WASHDC
RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHME/AMEMBASSY MEXICO 1915
RUCNCAN/ALL CANADIAN POSTS COLLECTIVE
UNCLAS SECTION 01 OF 04 OTTAWA 000070
SENSITIVE
SIPDIS
STATE FOR E, EB/DCT, WHA/EX, WHA/CAN
STATE PASS USTR (SULLIVAN)
COMMERCE FOR ITA/MAC (WORD)
TREASURY FOR IA (NEPHEW)
E.O. 12958: N/A
TAGS: ECON EFIN ETRD EINV EIND PREL PGOV CA
SUBJECT: Canada's Coming Federal Budget and Stimulus Prospects
REF: A. 08 OTTAWA 1574
¶B. 08 OTTAWA 1516 (AND PREVIOUS)
¶C. 08 OTTAWA 1372
¶D. 08 OTTAWA 1528
¶E. TORONTO 20
¶F. 08 TORONTO 204 (AND PREVIOUS)
SENSTIVE BUT UNCLASSIFIED. PLEASE PROTECT ACCORDINGLY
¶1. (SBU) Summary: With the economy dominating the political
landscape (ref a), Canada's opposition parties have made the January
27 federal budget a litmus test of PM Harper's ability to make his
Conservative minority government work. Ottawa observers estimate
that the budget will pass with just enough grudging support - or
abstentions - by the Liberals. Budget details remain hidden behind
Canadian secrecy rules until January 27, but the expected
legislation is the product of cross-country and cross-constituent
brokerage. The budget will likely contain considerable
infrastructure spending, tax cuts and credits aimed at the middle
class and industry, and a range of social spending initiatives.
Monetary stimulus - a combination of rate cuts and liquidity
injections - has been ongoing since November and the Bank of Canada
reports that there is room for additional monetary stimulus. End
Summary
Economic and Political Context
------------------------------
¶2. (SBU) Canada entered the world financial crisis with strong
economic fundamentals - including low unemployment, eleven years of
budget surpluses, record prices for commodities, and a
well-regulated banking sector. Despite these strengths, Canada's
medium-sized, open economy has little influence on the global stage
and is vulnerable to external forces. For example, exports to the
United States are critical to Canadian GDP, so falling U.S. demand
has had a quick and negative effect on the Canadian economy. Given
Canada's size and outward orientation, government stimulus packages
can do relatively little to promote recovery, other than make
competitiveness improvements at the margins and buy time until
export demand returns.
¶3. (SBU) The confluence of the global financial crisis and a
domestic parliamentary crisis (ref b) have made federal spending
debates more volatile than usual (ref d). On December 4, Prime
Minister Harper prevailed upon the Governor General to suspend
Parliament, which avoided the defeat of his minority government in
the House of Commons. While other factors played a role, much of
the parliamentary crisis was blamed on the government's overly
optimistic assessment of the Canadian economy and lackluster
proposals for stimulus and recovery. This provoked criticism that
the government was not doing enough to help Canadians deal with
domestic and global economic turmoil.
¶4. (SBU) The January 27 presentation of the FY 2009 budget provides
the Conservative government with an opportunity to make amends on
economic stimulus and to re-exert political leadership. PM Harper
has announced that his budget will contain significant spending that
will "sustain economic activity and confidence in Canada," even if
this means that Canada will once again take on a deficit that the
government admitted (likely to pre-empt criticism next week) on
January 23 will run as high as C$34 billion for 2009 and C$30
billion for 2010. This will push Canada's debt to GDP ratio from
23.4 percent in 2007 - the lowest among the G7 countries - to 28
Q23.4 percent in 2007 - the lowest among the G7 countries - to 28
percent. (Comment: Since 1998, running a federal deficit has been
anathema to Canada's political parties --ref c. End comment) On
January 22, the Bank of Canada separately predicted that Canada
would recover from its recession in less than year, with GDP
shrinking by 1.2 percent in 2009 and growing by 3.8 percent in
¶2010.
¶5. (SBU) The government stimulus package is expected to total
between C$20 and C$30 billion and to include a combination of tax
cuts, infrastructure spending, and assistance for those groups and
sectors hardest hit by the financial crisis (the last a key demand
of the opposition Liberal Party). Distributional decisions about
OTTAWA 00000070 002 OF 004
the stimulus could present problems because Canada's constitution
divides federal and provincial responsibility for economic issues.
Public federal funds are allocated to the provinces through transfer
payments and also through direct provision of services by federal
agencies in such areas as industry, natural resources, and the
environment.
Federal Assistance to the Provinces
-----------------------------------
¶6. (SBU) To preserve the stability of federal-provincial relations,
Ottawa seeks to treat all provinces equally on issues such as
infrastructure spending. Federal officials have been holding
cross-country meetings with provincial representatives and business
leaders to prepare the new budget. Infrastructure spending will
have to be coordinated with provinces, as will particular types of
sectoral assistance. At the same time, federal authorities must
weigh the costs and benefits of assisting regionally concentrated
industries, such as the auto sector (Ontario) and forestry (Quebec
and British Columbia), where longer-term competitive prospects are
uncertain. The federal government's early commitment to auto sector
assistance (ref e) has fuelled sectoral requests from other regions.
(A C$4 billion auto sector package was announced in December, with
more than C$1 billion coming from Ontario province.) Since 2006, PM
Harper has made significant monetary and political overtures to
Quebec in a largely unsuccessful bid to bolster federalism and to
build a new political base for the Conservatives in the province as
a key to a future majority victory. There is speculation that the
government's disappointing performance in Quebec in the October 2008
federal election might translate into less money for the province in
the January 27 budget if the government seeks instead to consolidate
support elsewhere, notably in Ontario.
Reaching out to the Opposition
------------------------------
¶7. (SBU) Since the December parliamentary crisis, PM Harper has
made some uncharacteristic efforts to reach out to his political
opponents, including the new leader of the official opposition,
Liberal party head Michael Ignatieff. Liberal economic critics have
also met at least once with their Conservative counterparts.
Ignatieff has publicly urged the government to focus on social
spending, including more generous unemployment and re-training
benefits and measures aimed at housing and infrastructure. All
three opposition parties, however, have complained that the
government's outreach and willingness to listen to their views have
been too little. Meanwhile, the Prime Minister's center-right
economic advisory panel has urged the government to avoid deep
deficits -- anathema to many Canadian voters, not only on the
Conservative side -- and to craft a limited stimulus package that
focuses on Canada's longer-term competitiveness. Privy Council
advisers told EMIN on January 23 that they were confident that the
opposition would approve this budget, albeit with complaints.
Prospects for Stimulus Spending
-------------------------------
¶8. (U) The government has indicated that its main budgetary focus
will be infrastructure spending and relief for the middle class.
Total government spending should fall close to the two percent of
QTotal government spending should fall close to the two percent of
GDP range endorsed by the IMF in January. For Canada, this
represents some C$30 billion, although falling government revenues
have prompted new spending estimates closer to C$20 billion.
¶9. (U) Infrastructure investment will likely include expanded and
accelerated spending on highways, bridges, roads, sewer and water
systems, public transit, and green energy. With a number of
infrastructure projects already in train, the total planned spending
on infrastructure now tops C$50 billion with approximately C$14
billion in expected new spending. However, federal cost-sharing
proposals for infrastructure are drawing criticism from
less-well-off provinces and municipalities, most notably at meetings
of provincial and municipal leaders with PM Harper during the week
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of January 12.
¶10. (SBU) The Canadian Council of Chief Executives and other
economic think tanks have recommended corporate income tax cuts to
encourage business investment, research and development, and
increased competitiveness. These cuts might be helpful in
countering deflationary pressures from the current recession. Tax
credits to encourage consumer spending are also expected. If the
government introduces broad social spending, it will likely want to
proceed cautiously with tax measures to avoid - by Canadian
standards - massive deficits.
¶11. (SBU) Stimulus to the manufacturing sector hangs on the question
of which sectors have the capacity for long-term competitiveness
once U.S. and global demand return. Canadian Conference Board Chief
Economist Glen Hodgson has recommended that the government provide
only minimal assistance to declining sectors and instead to
facilitate orderly downsizing.
¶12. (U) Commodity exports- especially energy and agriculture - are
expected to support the recovery of the Canadian economy as global
prices begin to rebound. There are few budgetary proposals for
stimulus in the commodities market except for continued calls for
green investment in the energy sector. Also, Alberta has warned the
federal government that the recent fall in oil prices will
significantly reduce the more than C$16 billion that the province
annually transfers to Ottawa.
Monetary Stimulus
-----------------
¶13. (U) Interventions by the Bank of Canada and the government in
monetary policy and the financial sector, respectively, have been
ongoing since October. The Bank has cut its benchmark lending rate
from three to one percent - and appears open to additional
quantitative easing (government purchases of securities and debt).
The government has already added more than C$100 billion in
liquidity to Canadian banks and government lenders. The global
crisis has served as a catalyst for other improvements in the
financial sector, including a restructuring plan for non-bank
sponsored asset-backed commercial paper (ref f and septel) and
progress toward the formation of a single national securities
regulator.
¶14. (U) A lingering financial problem that the government may
attempt to deal with in the budget is the shrinking secondary credit
market. Over the past four months, consumers and businesses have
found it increasingly difficult to lease vehicles and equipment.
Among the proposals under consideration by the government are loans
and guarantees for existing credit firms as well as regulatory
changes to allow more players into the market (e.g., allowing
chartered banks to offer auto leases). Canadian business
associations have also urged the government to provide equipment
loans directly to firms and to suspend tariffs on equipment
imports.
Comment
-------
¶15. (SBU) Despite Canada's solid economic fundamentals, the
government's budgetary stimulus will only work on the margins until
global demand recovers. Until then it must walk a fine line between
delivering "enough" spending to cushion the recession and satisfy
the opposition parties and reassuring its own Conservative base and
hesitant voters that the return to deficit is necessary and
temporary. While PM Harper has been largely unmoved by opposition
Qtemporary. While PM Harper has been largely unmoved by opposition
criticism in the past, Michael Ignatieff's promising start as
Liberal leader and the lingering option of a Liberal-NDP coalition
supported by the Bloc Quebecois appear to have led the Prime
Minister to approach the new budget in a more conciliatory way than
has been his norm, as well as to abandon a long-standing principle
against deficit spending in the short-run. End comment.
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