Financial Times | January 27, 2009
By Bernard Simon in Ottawa

Canada’s minority Conservative government was set to unveil a sweeping stimulus package of tax cuts and new spending initiatives late on Tuesday, pushing the federal budget into deficit for the first time since 1996.

The Tories have disclosed several elements of the package in recent days in a bid to avoid a repetition of the political crisis that brought them to the brink of defeat last November in the wake of a contentious mini-budget.

Promising “a spirit of open and non-partisan co-operation”, the government said at the opening of parliament on Monday that the measures “will be targeted, they will inject immediate stimulus while promoting long-term growth, and they will avoid a return to permanent deficits”.

The finance ministry forecasts a C$34bn ($28bn, £20bn, €21bn) deficit for the fiscal year starting on April 1, followed by a C$30bn shortfall in 2010-11. It has warned that a return to a balanced budget could take five years.

The stimulus package, which forms part of the annual budget, will include an extra C$7bn in spending on infrastructure, including roads, water and sewage facilities, universities, and environmentally friendly projects.

The government will require that a newly created infrastructure fund must be spent within two years to provide maximum impact. Public-private partnerships will be encouraged.

The budget marks a sharp turnaround for the Tories who insisted, just two months ago, that extra stimulus was not required and that the government could balance its books for the foreseeable future. Last November’s mini-budget foresaw spending cuts.

The three opposition parties dismissed the forecast as unrealistic in the current economic climate and threatened to join forces to bring down the government. But the prime minister, Stephen Harper, averted a no-confidence vote by persuading the governor-general to prorogue parliament until this week.

Since then, both Mr Harper and the opposition Liberals’ new leader, Michael Ignatieff, have taken a more conciliatory approach.

Mr Ignatieff has dampened talk of an opposition coalition, and is widely expected to instruct his MPs either to support or abstain from the budget vote.

Canada has so far been spared a housing crisis on the scale that the US has seen. However, sliding exports to the US, the slump in oil and metal prices and a pullback in consumer spending have darkened the economic outlook.

Most analysts expect the economy to shrink in the first half of this year, with a recovery starting in late 2009.

According to Dale Orr, economist at HIS Global Insight, the aim of the latest budget “is to provide a reasonable balance between the benefits of stimulus in providing incremental economic growth, without incurring too much increased debt after the economy has recovered”.

This year’s deficit is expected to boost Canada’s debt-to-GDP ratio to 28 per cent, from 23.4 per cent in 2007, which was the lowest among major industrial countries.