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April 11, 2102

 

Budget may be worth a look after all

With polls showing the Conservatives headed for a majority government their ideas might actually be implemented.

 

When the Canadian government released its budget a couple of weeks ago, the event was greeted with big yawns. The opposition Liberals, Bloc Québécois and New Democratic Party had all given strong hints that they would vote against the minority Conservative government’s proposals. This in turn would force an election so the budget would never get voted into law.

 

Even if the Conservatives won another minority government, as polls at the time indicated they might, pundits seemed to think, they would almost certainly have to change their initial proposals, in order to get support from one of the other parties.

 

However in recent weeks, several new polls have come out that indicate that the Conservatives might actually form a majority government. One poll released by Ipsos Reid shortly after the budget came out put the Tories ahead of the Liberals by 43 percent to 24 percent, though in other polls, the margin is lower. As a result, the Conservative budget, which many at the time lauded as a fairly tame offering, is generating renewed interest.

 

Staying the course

“Sticking to the game plan,” is how CIBC WorldMarkets economists Warren Lovely, Peter Buchanan and Avery Shenfeld, characterized the Conservative budget, whose main goals appeared to be to keep the Canadian economy on its current growth path and to gradually eliminate the federal deficit.

 

The proposals signal a return to moderation after years of efforts designed to help the economy out of recession. Direct program spending expenses are slated to be cut (from $124 billion in 2010-2011 to $188 billion by 2014-15) as are corporate taxes, as promised in previous conservative budgets.

 

“With grand scale fiscal stimulus giving way to leaner budgetary times, the 2011-12 budget will have much more limited implications for both the economy and financial markets than its predecessors,” the CIBC economists noted.

 

Part of the Conservatives’ moderation, stems from the fact that Canada has been quite lucky in the recent years. The country’s strong banking system, high raw material prices and a fairly expansionary monetary policy have helped its economy bounce back far quicker from recession than many other OECD nations.

 

Furthermore this week, the Bank of Canada announced that it was keeping its policy rate at just 1.00 percent. That’s important because the central bank policy rate influences interest rates on credit cards, mortgages and business loans, so keeping it this low acts as a stimulus to both consumption and business investment. In short, the Conservatives have clearly concluded that its time to take the foot off of the accelerator and to let the Canadian economy move on its own. “The (plan offers) just a few targeted measures that will give the economy a slight wind at its back,” notes Carlos Leitao, chief economist and strategist at Laurentian Bank Financial.  

 

Opposition proposals

While the opposition parties are far behind in the polls right now, it nevertheless pays to look at their proposals too, because if the Conservatives form a minority government, they may need to adopt some of them in exchange for their support on the budget vote. The Liberal’s current plan consists of foregoing the Conservatives’ planned corporate tax cuts, and replacing them with a mish-mash of initiatives designed to help families, to promote early childhood learning and the like. They also include increases in the Guaranteed Income Supplement and more funding for post-secondary education.

 

The Bloc Québécois for its part has no serious national proposals, and its platform basically consists of one demand: “more,” for Quebec –whatever form that may take. The New Democratic Party’s platform for its part is friendlier to small rather than big business and includes a proposal to limit credit card interest rates to prime (currently at 3 percent) plus 5 percent. Many credit card companies currently charge interest rates of more than 20 percent, so this proposal alone would save consumers hundreds of millions or dollars in payments each year.

 

Of course in the midst of an election campaign promises need to be taken for what they are - mostly just talk. But polls can change quickly. And this week’s leaders’ debate will likely focus most Canadians’ minds on the race for the first time.

 

Until that happens, we really can’t be sure whose budget ideas will end up in the law books.

 

Peter@peterdiekmeyer.com

 

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