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March 21, 2013

 

A housing friendly federal budget

Fiscal discipline should help keep mortgage borrowing costs down

 

When mortgage rates are at historically low levels, no financial and economics news … is good news. So although the Harper Government’s budget, which was released this week, has no direct measures that target Canada’s housing sector, its effect on home ownership costs will be significant says one expert. 

 

“There are no major new corporate, personal or sales taxes increases,” notes David Walsh, a tax partner with Ernst & Young. “However the fact that the government is on track to reduce the deficit sooner than anticipated will indirectly help keep borrowing costs down.”

 

While the Bank of Canada’s has a considerable effect on mortgage costs, Walsh points out that financial markets also play a key role. As a result, interest rates in countries with poorly managed finances, such as Greece, are much higher than in those (such as Canada) with sounder management.

 

Flaherty’s Budget 2013 document contained several direct targeted measures, ranging from increased infrastructure spending, to job training grants and tax advantages for manufacturers, that should help streamline economic development. Yet despite the new allocations, program spending is slated to fall from 13.6 percent of GDP in 2013-14 to 12.5 percent by 2017-18.

 

The big news was the government’s projection of an $800 million surplus for the 2015-16 fiscal year. “We could have done more,” said Finance Minister Jim Flaherty, regarding its belt tightening measures. “But the key was maintaining an overall balance.”

 

Budgets are important because they force governments to take overall stock of the economy. Right now, at least on a relative basis, things look good here. Although Canada’s projected deficit for the current fiscal year is near $18 billion, that is only about one percent of the country’s economic output - a fraction of the US level.  Furthermore, Canada is the only G-7 country whose overall debt (including provincial and municipal liabilities) is less 50 percent of its gross domestic product. The only other which even comes close is Germany.

 

Several measures in Flaherty’s budget are specifically targeted to keep Canada’s position strong. For example the government announced a ten year $53.5 billion infrastructure related to new roads, bridges, public transit and the like. This additional spending, which hedges against possible sluggish private sector investment, is a tacit acknowledgement that although Canada is doing well, overall economic risks remain high.

 

New Canada Job Grants, which will provide up to $5,000 per person in training funds, to be matched by employers, provinces and the federal government, are another innovative measure. This plan is slated to help alleviate the mismatch between the large number of skilled jobs available, and unemployed Canadians who lack the qualifications to fill them.  

 

As Dan Kelly, president of the Canadian Federation of Independent Business notes, the budget also contained measures that should foster job creation going forward such as extended accelerated capital cost allowance deductions for manufacturers. While tax breaks to businesses are never popular, this one, which provides a clear incentive for companies to keep jobs here, rather than outsourcing overseas, fills a real need.

 

Peter@peterdiekmeyer.com

 

 

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