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Expect a cautious federal budget as Liberals brace for the Trump effect

Finance Minister Bill Morneau is planning to deliver a careful budget that doesn’t include big new spending, sources say.

FRED CHARTRAND/THE CANADIAN PRESS

Expect this year's federal budget to have a big helping of cautious wait-and-see – in case next year's requires a response to what Donald Trump is doing south of the border.

The new U.S. President has promised major tax cuts that could eventually have an impact on Canada, and his administration is starting to outline some of its budget plans.

But while Finance Minister Bill Morneau will be watching closely this week as he visits New York and Washington, he won't react to Mr. Trump's tax moves by trying to mirror or anticipate them in his upcoming budget, expected in March, according to sources familiar with the planning.

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Instead, he's planning to deliver a careful budget that doesn't include big new spending that would have a major impact on the bottom line – leaving room, if necessary, to respond to U.S. changes in next year's budget, in 2018.

Mr. Trump has promised to slash corporate taxes in the United States, and that would put pressure on Ottawa to follow suit, or risk losing business investment. But it's not clear what Mr. Trump will propose now, or what the U.S. Congress will actually pass. Canadian budget planners expect it to be months before they know. And Mr. Morneau's 2017 plan is set: a cautious budget that will keep some powder dry.

Where last year's budget pumped large new sums into infrastructure spending, a new Canada child benefit and spending in First Nations, the 2017 budget will be a very different document, one insider said.

It will be billed as a continuation of a medium-term plan to promote economic growth and will rely on money already set aside last year, in some cases presenting details on how already allocated sums will be used. Budget 2016 provided $800-million for innovation "clusters," so Budget 2017 can detail how it will be spent; the 2016 budget set aside sums for clean technology and infrastructure that could be dedicated to more specific initiatives this year. That doesn't mean there won't be new measures, but in general, they would have to be financed by wrapping up old ones.

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It's supposed to be a "prudent" budget that will keep some financial room available for next year. Presumably, that means keeping a lid on budget deficits for 2018 and beyond.

But it's not clear what is coming from south of the border. Mr. Trump is starting to outline his budget plans this week, and Mr. Morneau will meet with new Treasury Secretary Steven Mnuchin on Wednesday. The Finance Minister is one of many Canadian ministers who have trooped to Washington to sell Canada's message and look for clues to U.S. plans on trade, but Mr. Morneau will also be seeking understand Mr. Trump's tax plans.

On the surface, it's simple: Mr. Trump promised to cut corporate taxes and personal-income taxes. But he's also planning to increase military spending by $54-billion (U.S.) and he'll face resistance from Republicans in Congress if he intends to inflate an annual budget deficit that's already running at about $600-billion (U.S.).

It's corporate tax cuts that would really put pressure on the Liberal government in Ottawa. Canada touts its lower corporate taxes, but Mr. Trump promised to cut the U.S. rate from 35 per cent to 15 per cent. "That would turn the tables on us," said Bank of Montreal chief economist Douglas Porter. It would spark concern that Canada could lose business investment to the United States.

But it's not clear it will go ahead. Republicans in the House and Senate have differences on tax reform, Mr. Porter noted. It's not clear when or how they'll resolve it. Congressional leaders are now targeting a smaller corporate tax-rate cut, to 20 per cent.

Queen's University economist Don Drummond, a former federal finance official, noted that slashing corporate tax rates could kick a hole in the U.S. budget, and that might force Mr. Trump to follow through on also cutting corporate tax loopholes. Some Republicans want to cut more of those so-called tax preferences – so the effective tax rate paid by U.S. firms might not be reduced very much. With all that uncertainty, Mr. Drummond said, "it would be the height of folly" for Mr. Morneau to try anticipate Mr. Trump's plans in this year's budget.

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So Mr. Morneau is planning caution: Next year's budget might require a response to Mr. Trump.

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About the Author
Chief political writer

Campbell Clark has been a political writer in The Globe and Mail’s Ottawa bureau since 2000. Before that he worked for The Montreal Gazette and the National Post. He writes about Canadian politics and foreign policy. More

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