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P 302113Z JAN 09
FM AMEMBASSY OTTAWA
TO RUEHC/SECSTATE WASHDC PRIORITY 9032
INFO RHEHAAA/WHITE HOUSE WASHDC
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UNCLAS SECTION 01 OF 02 OTTAWA 000080 
 
STATE FOR E, EB/DCT, WHA/EX, WHA/CAN 
 
STATE PASS USTR (SULLIVAN) 
 
COMMERCE FOR ITA/MAC (WORD) 
 
TREASURY FOR IA (NEPHEW) 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD EINV EIND PREL PGOV CA
SUBJECT: Canada Budget Offers Economic Stimulus 
 
Refs:  (A) OTTAWA 70    (B) OTTAWA 78 
 
 
SENSTIVE BUT UNCLASSIFIED.  PLEASE PROTECT ACCORDINGLY 
 
¶1. (SBU) Summary: Although battered by economic shocks, Canada is 
well positioned for economic recovery if and when commodity prices 
rise and U.S. demand returns.  To best position Canada for eventual 
recovery, the Conservative government's January 27 budget provides 
massive (by Canadian standards) fiscal stimulus measures and 
immediate relief for those hardest hit by the recession.  The budget 
also went some way to at least paper over the political divisions 
that threatened the minority Conservative government in December 
(ref b). End Summary 
 
Strategy for Coping with the Global Economic Crisis 
--------------------------------------------- ------ 
 
¶2. (SBU) In its January 26 Throne Speech, the government announced 
that its strategy for crisis recovery would be to balance short-term 
deficit spending with long-term growth measures that would avoid 
lasting deficits.  (Comment:  Given the Canadian economy's 
relatively small size and outward orientation, government stimulus 
packages can do little to promote recovery, other than make marginal 
improvements until export demand returns (ref a). Since the United 
States absorbs more than 80 percent of Canadian goods exports, 
Canada's economic prospects are directly tied to recovery in the 
United States. End comment.) 
 
Budget Contents 
--------------- 
 
 
¶3. (U) The Harper budget provides approximately C$40 billion in 
stimulus over two years focused on infrastructure, tax breaks and 
access to credit, support for troubled industries and targeted 
assistance for vulnerable groups and individuals. There are also 
some key measures such as middle class tax breaks and renovation 
credits that should have broad voter appeal. The government predicts 
these actions will create 190,000 new jobs. 
 
¶4. (U) On infrastructure, the federal government has promised C$14 
billion in new spending (with a further C$9 billion from provinces 
and a C$4 billion loan fund for low-income regions). 
 
¶5. (U) Modest but permanent tax breaks are offered to Canadians 
earning less than C$80,000 per year. Corporate taxes are being 
reduced from 19 to 15 percent and more small businesses will be 
eligible for preferential tax treatment. 
 
¶6. (U) Commercial credit will be expanded through liquidity 
injections to government lending agencies including the Export 
Development Corporation and the Business Development Bank which will 
be made available as soft credit to Canadian enterprises. Other 
credit measures include re-visiting the possibility of allowing 
chartered banks to offer automotive leases and increased federal 
oversight of credit card grace periods and consumer disclosure 
requirements. 
 
¶7. (U) Under the budget, targeted assistance will be available to 
communities with sectors which are specifically affected by the 
downturn (e.g., forestry, fishing) and one-industry towns.  The 
government also focused on the unemployed, the elderly, the 
disabled, and First Nations communities for special assistance in 
skills, housing, and income support. 
 
Deficit and recovery projections 
-------------------------------- 
 
¶8. (SBU) The government projects that Canada's deficit will hit C$64 
billion in two years (roughly 2.5 percent of GDP), with federal 
Qbillion in two years (roughly 2.5 percent of GDP), with federal 
budget going into deficit for the first time in twelve years.  The 
last time the budget was in deficit in 1997, debt charges consumed 
20 cents of every federal tax dollar.  Today, the rate is to 13 
cents.  The Bank of Canada predicts that Canada come out of 
recession within a year, but Finance Minister Jim Flaherty admits 
that his budget is based on more pessimistic growth projections than 
 
OTTAWA 00000080  002 OF 002 
 
 
those used by the Bank. 
 
¶9. (SBU) Although the government has been accused of moving too 
slowly with recovery plans, the volatility of economic conditions 
has made it difficult to see exactly where the economy is headed. 
The Ministry of Finance now predicts a 0.8 percent contraction of 
the economy in 2009 even though growth of 1.1 percent had been 
forecast two months ago in the government's November Economic and 
Fiscal Update. For 2010, the government is still predicting solid 
growth of 2.4 percent, down 0.2 percentage points from the previous 
forecast. 
 
Trade-distorting effects of stimulus measures 
--------------------------------------------- 
 
 
¶10. (U) Canadian stimulus measures are not expected to violate any 
NAFTA commitments or WTO rules on subsidies since they are not tied 
to exports nor contain local content requirements. Any measures that 
are specific to a sector (such as autos and forestry) may qualify as 
non-actionable spending on research, aid to disadvantaged 
communities, or environmental protection. 
 
 
Comment: 
-------- 
 
 
¶11. (SBU) While Canada is counting on a return of U.S. demand, 
Canada's economic recovery could be bumpy.  U.S. firms that serve as 
the hub for many Canadian business activities might not survive the 
economic crisis. Also, integrated U.S.-Canada supply chains could be 
disrupted by national protectionism measures adopted during the 
economic crisis.  This uncertainty (and the fear of needless deficit 
spending) helps explain why the government has kept a prudent line 
on spending (2.5 percent over two years in recognition of their G20 
commitment with no new spending guaranteed). End comment