This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS E F T O SECTION 01 OF 04 OTTAWA 000375 
 
SIPDIS 
 
NOFORN 
SENSITIVE 
 
DEPARTMENT FOR EB/IFD, EB/OMA, WHA/EPSC, AND WHA/CAN 
STATE PASS FEDERAL RESERVE BANK FOR CHUGH 
STATE PASS SEC FOR JACOBS 
TREASURY FOR DAVID NAGOSKI AND WILBUR MONROE 
PARIS ALSO FOR USOECD 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PGOV CA
SUBJECT: CANADA'S BUDGET:  MINORITY STATUS NOT EXPECTED TO 
DERAIL THE LIBERALS 
 
REF: A. OTTAWA 336 (OFFSHORE REVENUES) 
     ¶B. 04 OTTAWA 2560 (HEALTH CARE) 
     ¶C. 04 OTTAWA 2779 (2004 SURPLUS) 
     ¶D. 04 OTTAWA 832 (2004 BUDGET) 
 
¶1. (SBU/noforn) Summary:  This year's budget could be a 
brawl.  The budget vote is the only absolute confidence vote 
that Paul Martin's government will face in the short term and 
debate is expected to be vigorous.  Finance Minister Goodale 
plans to present the budget to Parliament on February 23. It 
will be PM Paul Martin's second budget since assuming office 
and his first as leader of a minority government.  We 
estimate that it will reflect pre-election positioning and 
contain funding for foreign policy initiatives from the 
yet-to-be-revealed International Policy Statement (or Review) 
that has been the subject of contentious inter-agency 
negotiating for over a year. We are told to expect additional 
allocations for security, the financial sector and 
environmental issues, "but nothing major." 
 
¶2.  (SBU/noforn) For the past decade, the Liberal majority 
could count on the budget being approved by parliament 
without any changes and with minimal debate.  However, this 
year opposition parties are demanding that their new status 
be recognized and complain that they are not being adequately 
consulted.  Department of Finance officials find themselves 
in the new position of reaching out to opposition members and 
to newly-empowered Liberal party back-benchers.  However, the 
broad consultations seem intended less to find consensus and 
more to bullet-proof the Liberal's budget from opposition 
attack.  The finance critics of the two largest opposition 
parties tell us that although they intend to push as hard as 
they can, they have no interest in bringing down the 
government over this budget.  Parties are staking their turf 
for the next election and policy makers at Finance appear to 
welcome the coming confrontation, saying, with gleaming eyes, 
"If the opposition parties want to present a budget, they 
should win an election."  End summary. 
 
Another boom year - Surplus and Frugality 
----------------------------------------- 
 
¶3.  (U) The surplus is on track to be even larger than last 
year's C$9 billion (about US$7 billion).  Forecasts of this 
year's surplus have increased from C$4 billion in the 2004 
budget to almost C$9 billion by last November, and are still 
growing.  Despite some weakness in the real economy, revenues 
for the current year (2004-05) are holding up and 
expenditures are as projected in last year's budget.  This 
provides a fiscal cushion for the government's recent 
negotiations with the provinces on health care spending, 
federal provincial transfers ("equalization payments"), and 
revenue sharing for offshore resources (refs A and B).  The 
accuracy of the government's fiscal forecasts has been a 
contentious issue (last year's surplus exceeded GOC forecasts 
by about C$7 billion (ref C), but even the opposition finance 
critics now admits efforts to refine the forecasting process 
are in train. 
 
¶4.  (U) The government-wide expenditure review introduced by 
PM Martin upon assuming office, whereby each department is to 
annually identify savings and low-priority spending 
equivalent to 5% of its budget, has been going smoothly and 
will provide additional budget flexibility.  It will affect 
each federal department, but many of the savings will be from 
government-wide initiatives such as more efficient 
procurement and property management.  Finance Minister Ralph 
Goodale recently told national media that Canadians can 
expect no pre-election style "goodies," saying he has a plan 
for the full term and is going to stick to it. 
 
Liberals are reaching out... 
---------------------------- 
 
¶5.  (SBU/noforn) Just after the June 2004 election, the 
Department of Finance detailed a senior budget expert to 
liaise more directly with Parliamentarians and their staff. 
The objective was to advance the priorities laid out in the 
Speech from the Throne as fully as possible.  All sides 
expect the budget process to be much more complex in a 
minority government, and the government understands that it 
is important to maintain contact with the opposition and 
Liberal backbenchers who had not previously been a factor in 
the budget process.  Officials take satisfaction in having 
"done" health care, equalization, and offshore revenues (refs 
A and B) so they can focus on the big picture of the Liberal 
platform:  childcare, cities, defense and 
productivity/prosperity (i.e., taxes).  As one contact put 
it, "the budget is all perception and the parties are 
claiming their turf." 
 
¶6.  (SBU/noforn) A more rambunctious Liberal party caucus 
provides another new dynamic in the budget process.  Recent 
parliamentary reforms permit any member to introduce a bill. 
Although they cannot propose increases in revenue or taxes, 
they can propose spending cuts.  So far, 30 bills have been 
accepted for consideration by the House.  Some were ruled out 
of order (because they involved revenue increases) but four 
tax-reduction measures are being considered and require time 
to debate (and hopefully, according to Finance, defeat). 
 
...Sort of 
---------- 
 
¶7.  (SBU/noforn) Finance Minister Goodale and his top 
officials have traveled the country for pre-budget 
consultations in every province.  There is an effort to allow 
as many groups as possible to speak to the Minister directly, 
and regional meetings include the full range of interest 
groups in each region, with the implicit message that there 
is stiff competition for funding.  The Minister also meets 
with members of the Liberal Caucus in each province, in 
recognition of the fact that in a minority government there 
needs to be extra effort to keep the troops on board.  The 
intensive schedule of consultations does not necessarily 
reflect a search for consensus.  Finance officials seem to 
relish the expected tussle in Parliament, with more than one 
Finance contact saying, "We ran on a platform and won." 
 
¶8.  (U) The House Finance Committee should be the only 
committee to consider the budget, but the dynamics of the 
budget approval process in a minority government are new to 
everyone.  This is the only absolute confidence vote the 
Liberal government will face in the short term.  Comment:  We 
expect back scratching, log rolling and coalition building, 
but the extent to which that will result in significant delay 
or changes to Liberal's budget priorities is unpredictable. 
End comment. 
 
¶9.  (SBU/noforn) One expert close to the budget process noted 
that, in terms of pre-election positioning, the Conservative 
party has not really gained strong support from the business 
community but "the budget could change that, if it's 
Socialist."  However, from what we hear, Martin's team is 
working hard to make sure their budget cherry-picks the best 
ideas from each party.  Given their healthy fiscal position, 
there should be no problem funding initiatives that will 
appeal to voters while still maintaining "balanced budgets or 
better."  Budget officials predict that although the NDP and 
Bloc Quebecois parties may be "on a different wavelength," 
the Liberals will be able to work with the Conservatives, but 
will have to be willing to trade.  It would be possible to 
"do something with the NDP on social issues," but could be 
expensive. 
 
Conservatives:  Cut taxes; support the military 
--------------------------------------------- -- 
 
¶10.  (SBU/noforn) During a meeting with emboffs last fall, 
Conservative Party finance critic Monte Solberg said they 
expect more outreach than in the past by the Liberal party, 
but had not seen signs of it yet.  (Note: the Finance 
Minister has since held meetings with opposition leaders. 
End note.)  He confirmed that each party is testing the 
waters in the new minority environment, trying to see how far 
they can push things without bringing down the government. 
Conservative Party parliamentarians are considered unlikely 
to support a no-confidence vote at least until after their 
policy convention on March 17-19.  At this point, the 
Conservatives do not have a party platform and are thus not 
in a strong position to contest an election. A financial 
consultant with experience at the Bank of Canada and 
Department of Finance who is working on the Conservative 
party financial platform for the March policy convention said 
they are working hard to weed divisive items (such as bank 
mergers) out of the platform. 
 
¶11.  (U) In an open letter to Finance Minister Goodale on 
January 28, Solberg called on the Liberals to include 
significant tax cuts (especially on personal income taxes and 
"job-killing" capital taxes, employment insurance premiums, 
capital gains taxes); measures to enhance business incentives 
and attract investment (improve infrastructure and support 
cities, refine regulations, raise the capital gains 
exemption, expand the tuition grant program, remove federal 
taxes on scholarships); and spending on the military 
(especially heavy lift capacity) in the upcoming budget.  He, 
like the NDP, called for an independent process for 
forecasting the financial situation, noting that consistent 
low-balling of the surplus curtailed discussion of tax cuts. 
He also wants the budget to "reduce the fiscal imbalance" 
between the federal and provincial governments (an imbalance 
federal officials claim does not exist).  Solberg was quoted 
February 4 saying that, short of tax increases or deficit 
spending (both against the current government's policies), 
there is no way the Conservatives want to risk forcing an 
election because Canadian voters simply do not want an 
election now. 
 
¶12.  (SBU/noforn) Comment:  Although to us these priorities 
show a similarity to the government's goals, probably 
reflecting both Liberal party efforts to undermine the 
Conservative platform and Conservative efforts to move 
towards the middle, a GOC official described them as not in 
alignment with the Liberal's priorities expressed in the 
Speech from the Throne.  End comment. 
 
NDP: Not looking to bring down the government 
--------------------------------------------- 
 
¶13.  (SBU/noforn)  The NDP's Finance Critic complained to the 
press after her recent meeting with the Minister of Finance 
that the Liberals are shutting out the opposition, but this 
was clearly political bravado as we were subsequently told by 
her staff that she felt the "meeting was good."  Top 
officials at Finance note wryly that the publicity "won't 
encourage further outreach by the Minister."  Despite 
provocative statments by NDP leader Jack Layton on February 
4, NDP staffers tell us there is no intention of using the 
budget to bring down the government, and the party will not 
"set an impossible target" of items it requires in order to 
vote for the budget. 
 
¶14.  (U) The NDP shares other opposition parties' outrage at 
what they perceive as lack of forecasting transparency, and 
calls for creation of an independent budget office.  (Note: 
For several years the GOC has used surveys of private sector 
forecasters to estimate the surplus.  The evolution of those 
forecasts is published in the budget document each year.  End 
note.)  They want more Parliamentary input on use of the 
surplus, favoring more gradual debt reduction and higher 
spending on infrastructure, meeting Kyoto commitments, 
housing, childcare, and education.  They oppose tax cuts, 
except for low-income citizens. 
 
International Policy Statement:  Can't agree, but can budget 
--------------------------------------------- ------ 
¶15.  (SBU/noforn) Everyone we talk to who is involved in the 
long-awaited interagency review of Canada's role in the 
world, the International Policy Statement, confirms that it 
has been a much more contentious and difficult process than 
expected, and there is unlikely to be consensus before the 
budget.  However, the government plans to include in the 
budget allocations that will support key international 
priorities.  We've been told to look for budget allocations 
for security, the financial sector and environmental issues, 
although "nothing major." 
 
Visit Canada's Classified Web Site at 
http://www.state.sgov.gov/p/wha/ottawa 
 
CELLUCCI