Federal Government Budget
On March 29, 2012, Mr. Jim Flaherty, Canada’s Minister of Finance, tabled a federal budget designed to reduce government spending without disrupting Canada’s economic growth in what remains a fragile recovery from the global financial crisis.
Relative to other developed economies, particularly those amongst the Group of Seven (G7) countries, Canada’s recovery from the most recent recession has been successful. The recession here was not as deep as elsewhere and the corresponding rebound in GDP growth also compared favourably. Although an increase in government spending was a key contributor to the recovery, Canada has maintained the lowest net debt/GDP ratio of any G7 country.
The other key contributor to Canada’s economy has been continued growth in domestic spending, particularly amongst consumers. As expected, the tabled budget includes savings of $4.8 billion planned over the next five years, and a lower spending growth rate aimed at eliminating Canada’s deficit by 2015 – 2016. Despite the noted savings and reduced spending, the budget contains several measures designed to support growth in consumer and business spending, which remain as key contributors to Canada’s economic recovery.
Impact on Consumer Spending
Overall, the tabled budget is unlikely to lower consumer confidence in Canada’s economic recovery and will only have a slightly negative direct impact on the labour market. Instead, the consumer’s ability to support economic growth in Canada is affected largely by continuing high levels of personal debt, elevated housing prices, and the perception that volatile global growth has a detrimental effect on net worth.
Returning to the budget, the elimination of 19,200 government jobs will have a negative impact on Canada’s labour market conditions; however, a portion of the impact will be absorbed by attrition and corresponding potential improvement in the private sector. A combination of lowering small business payroll costs by $205 million in 2012 and investing $50 million over two years to improve youth employment are two of the more significant measures aimed at improving labour market conditions in the private sector.
Impact on Business Spending
Canada’s businesses continue to have access to cheap credit and are well positioned to continue their support of the Canadian economy. The 2012 budget is clearly designed to provide efficiencies for conducting business in Canada and is supportive of industries that are exposed to the more rapid expansion of emerging economies.
Specifically, the government has committed to a more efficient decision making process for major economic projects (specifically those that are resource-based), reduced regulatory hurdles for projects involving natural resources, improved support for venture capital activities as well as research and development, and both direct and indirect measures designed to support the expansion of international trade.
Impact to Economic Growth
Despite spending cuts and plans to augment future spending at a more marginal pace, the tabled budget can be considered a reflection of the fragile global economic environment manifesting through moderate growth in the Canadian economy. Consequently, the budget is unlikely to have a significant impact on the Canadian economy’s ability to grow and, more importantly, the Canadian government is well positioned, relative to other developed economies, to provide additional support without causing a significant decline in investor confidence or a substantial increase in government bond yields as a direct result of increased spending.
For more information: http://www.budget.gc.ca/2012/home-accueil-eng.html
Prepared by:
Wesley Blight, CFA, CIM, FCSI
Senior Investment Analyst
Investment Management and Strategy
MD Physician Services
March 30, 2012
