Title: A housing friendly budget
Sub-title: The new budget should provide a backstop for the country’s struggling housing sector. But will it be enough to turn the economy around?
Canada’s housing sector continues to be hit hard by the global economic downturn. Tighter bank lending and a weak job market are dragging down new and existing home prices. Housing starts have slowed and builders are beginning to lay off staff. In short, property owners and industry stakeholders need a good shot in the arm. Judging from this week’s federal budget, they just might get it.
The budget comes at particularly challenging time. The country is in recession and forecasts are that the economy will shrink even more next year, so tax revenues will drop too. To help stem the tide, Finance Minister James Flaherty announced a slew of new tax cuts and spending measures.
Stimulus for the housing sector
The good news is that when governments want to stimulate the economy, one of sectors in which they can get the best bang for the buck is housing. For example according to the Canadian Real Estate Association, each residential real estate transaction in Canada generates close to $32,000 in ancillary consumer spending. New home construction and renovation activity also spur substantial spin-off benefits.
During the recent budget, the government made $7.8 billion worth of moves to help take advantage of those trends.
However one of the first casualties of recession is fiscal responsibility. So contrary to its position just eight weeks ago, the government also announced that it would run a $34 billion deficit during the upcoming fiscal year. According to one expert, the move comes as no surprise. “The era of government surpluses is over,” said Jeff Rubin, an economist with CIBC World Markets. “In fact Canadian deficits are still small relative to the size of our economy, compared to what they were during the previous recession and relative to what they are in the U.S.”
Are the new measures enough?
Changes to the housing sector were only part of the federal government’s tax cut and spending initiatives, which should total close to $52 billion over the coming two years. New personal and business tax cuts were also announced. The most important of these were increases in the basic personal exemption and adjustments to the two lower tax brackets. Businesses and seniors will also get relief. However according to one expert, the new tax breaks alone are unlikely to do much to stem the current downturn.
“Economic stimulus is most effective when it acts right away,” said Luc Godbout, a professor of taxation at the University of Sherbrooke. “Some of the measures announced, notably the renovation credits do that. However raising the tax brackets and basic personal exemptions are permanent measures. They provide relief over a much longer term, even after the current difficulties are long over.”
More bad news came the day after the government released its budget, when the International Monetary Fund cuts its estimate of Canadian GDP growth to -1.2 percent. That is below the federal government’s -0.8 percent GDP growth estimate. If the IMF is right, that means the Canadian government’s tax revenues will be less than expected and that the deficit would rise.
Will the budget pass?
As if that wasn’t enough, another big question out there is whether the measures announced in the budget will eventually become law. The Conservative government is currently in a tenuous minority position and needs support from at least one other major political party to get its bill through Parliament.
Yet as of mid-week both the New Democratic Party and the Bloc Québécois had indicated that they would vote against the measures. However the Liberals, led by their new leader Michael Ignatieff, continued to sit on the fence, in part due to the fact that if the new budget is defeated, an election could follow. This would present a major challenge for the party, which is known to be short of the financing that they would like to have in order to be able to run a successful campaign. Stay tuned.
Peter Diekmeyer (email@example.com) is Bankrate.ca’s Quebec correspondent.
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