Budget wins praise, though some skepticism

Share

Ratings agencies and economists applauded Finance Minister Jim Flaherty's latest budget, citing a deficit-reduction plan that remains on target and supports Canada's triple A-rating.

"The prospect of a return to budget balance by 2015-16 and the beginning of a decline in the debt ratios after the 2014-15 year indicate that, relative to other large Aaa-rated sovereigns, Canada's debt position will remain favourable," said Moody's Investor Service, one of the world's major ratings agencies.

"Even though economic growth is slowing and government revenue has recently exhibited some weakness, the projected deficit in the coming fiscal year, at 1 per cent of GDP, remains modest by global standards, according to Moody's," the agency added in a statement.

"Furthermore, the government's commitment to expenditure reductions in order to keep the deficit on target over the medium term is positive, despite its possible marginal effect on economic growth. Expenditure is budgeted to rise by less than 1 per cent in nominal terms in the coming year and by an average of 2.3 per cent annually in the coming five years. If achieved, this would bring the level of federal government expenditure in relation to GDP to its lowest level in decades."

Mr. Flaherty on Thursday unveiled a budget that aim's to eliminate the $26-billion deficit within two years, despite the headwinds of global economic uncertainty, lower prices for key commodities, and a strong currency that is weighing on the manufacturing sector.

By raising import tariffs on some countries, closing tax loopholes and counting on an economic rebound after the weak start to this year, the government expects to boost tax revenues by some $25-billion over two years.

There are also initiatives to boost the manufacturing sector and deal with the need for skilled labour.

Here are the views of some economists:

• “Much like last year, the budget goes out of its way to soft-pedal any restraint, distancing itself from the austerity seen in much of Europe and now arriving on U.S. shores. The revised fiscal outlook provides strong justification why a go-slow approach is entirely appropriate – the deficit trajectory is running about as expected, as layers of prudence have largely matched the underperformance of the economy.” Douglas Porter, Michael Gregory, BMO Nesbitt Burns

• “Overall, the budget 2013 contains very few new measures and continues to aim at balancing the books in fiscal year 2015. However, with our expectations that growth is likely to be weaker than assumed in the budget, some adjustments may be needed in the future. Moreover, we believe that pushing back the return to a balanced budget, would have eased the amount of fiscal contraction in the coming years and provided some support to growth at the margin. The impact of the budget on the market will mainly come from the decision to supply more long-term bonds than previously announced.” Charles St-Arnaud, Nomura Securities

• “The heavy reliance on promised increased tax collection along with lower program spending to achieve the better fiscal outcome can prompt some skepticism about the government’s ability to make good on these promises. However, countering this skepticism is the government’s reasonable track record in recent years of delivering on such promises.” Paul Ferley, Nathan Janzen, Royal Bank of Canada

• “All considered, Canada’s federal government is well ahead of most others in slaying the deficit dragon so there should be little implication for its triple-A rated debt or the Canadian dollar. The fact that the government continues its expenditure restraint regime is another reason why the Bank of Canada is not in a major rush to raise rates.” Derek Burleton, Sonya Gulati, Toronto-Dominion Bank

• “In Canada’s struggle to raise its productivity, increase innovation and strengthen its goods and services trade balance, one pragmatic route is removing barriers to mid-term growth. One of the most frequently referenced barriers is the skilled labour shortage in some industries while unemployment remains high among specific groups such as youth and the First Nations. Pragmatic measures, such as increased apprenticeships and internships, appear worthwhile, as does the new emphasis in re-assessing a program’s effectiveness. Ottawa’s measures to ensure Canada’s future fiscal flexibility represent an investment that should eventually return large dividends. Over the next two to three years, the increasing forward momentum of the U.S. economy may provide important support to our economy as Ottawa eliminates its red ink.” Mary Webb, Bank of Nova Scotia

• “Reducing the deficit by $12.1-billion between 2013-14 and 2014-15 is an ambitious objective, but it will be attainable if nominal growth matches the projections and the cost of debt financing remains low. On the latter point, the government’s commitment to sound fiscal policy will no doubt continue to pay off. Small deficits will not reverse the downtrend of the net-debt-to-GDP ratio, which is expected to fall from 33.8 per cent a year from now to less than 30 per cent by 2016-17 – an enviable position among the advanced economies. We think this strategy will keep Canadian long-term interest rates advantageous for the Canadian economy and below those of the United States.” Stéfane Marion, Marc Pinsonneault, National Bank of Canada