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

151956Z Nov 05

UNCLAS SECTION 01 OF 02 OTTAWA 003399 
 
SIPDIS 
 
DEPT FOR WHA/CAN (HOLST) AND INR (SALCEDO) 
 
USDOC FOR 4310/MAC/ONA 
 
TREASURY FOR IMI 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV CA
SUBJECT:  GOC PAVES ROAD TO WINTER ELECTION BY PROMISING 
          BIG TAX CUTS, MODEST NEW SPENDING 
 
REF: (A) OTTAWA 2931     (B) 04 OTTAWA 2837 AND PREVIOUS 
 
¶1.   SUMMARY/INTRODUCTION:  On November 14 the GOC's annual 
Economic Update to Parliament took on new life as the 
Liberal Party's campaign platform.  In an hour-long 
presentation to the House Finance Committee, Finance 
Minister Ralph Goodale recapped Canada's strong fiscal 
condition and promised a business- and voter-friendly 
package of measures that appeal to both the left and the 
right.  A budget in all but name, the update is also 
effectively the Liberals' campaign platform, and it was 
announced amid jockeying by all four parties in Parliament 
to influence the means and timing of the election call. 
 
¶2.   The centerpiece of the update is approximately C$30 
billion (US$25 billion) in personal and corporate tax 
reductions over the coming five years, which earned positive 
reviews from business leaders.  The GOC also promises modest 
new spending on post-secondary education, immigrant 
settlement, and trade promotion in big emerging markets. 
Nevertheless, the update projects continued GOC fiscal 
surpluses (in the range of C$8-11 billion annually over the 
next five years), even with modest real GDP growth (around 
3%).  Full details of the GOC's economic update are 
available on the Internet at www.fin.gc.ca.  END 
SUMMARY/INTRODUCTION. 
 
¶3.   BACKGROUND:  Since taking office in 1993 the Liberal 
Party has presided over spectacular improvements in Canada's 
economy.  Current Prime Minister Paul Martin, as finance 
minister from 1993-2000, led the attack on the GOC's 
structural deficits by reducing the size of the federal 
government and (in effect) "downloading" many program costs 
to provincial governments.  In 2000, with ongoing large 
surpluses on the horizon and the debt-to-GDP ratio falling, 
the GOC delivered substantial personal tax cuts.  Since 
then, fiscal policy initiatives have focused on restoring 
funding to the provincial governments' publicly-paid health 
care systems, which suffered during the years of fiscal 
restraint and have been the top concern among voters for the 
past decade. 
 
¶4.   ELECTION CONTEXT:  The ruling Liberal Party, which has 
held office at the federal level since 1993 but has been in 
a minority in Parliament since June 2004, has braced itself 
for a likely winter election by turning its mid-year 
"economic update" into a campaign platform.  In a bargain 
last spring that gained temporary support from the left-of- 
center New Democratic Party (NDP), they modified their March 
2005 budget by removing corporate tax cuts (ref A).  With 
the NDP now joining the other opposition parties 
(Conservative and Bloc Quebecois) in expressing loss of 
confidence in the government and an intention to force an 
election, the Liberals have revived those tax cuts and 
rolled them into a good-news budget platform that they hope 
will get them re-elected with a majority, strengthening 
their ability to govern. 
 
¶5.   PERSONAL TAX RELIEF:  The main tax relief measures 
promised in the update are an increase in the basic personal 
exemption by C$500; a cut in the lowest income tax bracket 
to 15% from 16%, retroactive to January 2005; and cuts in 
the two higher tax brackets by one percentage point by 2010. 
Of the estimated C$30 billion in total tax relief over five 
years, Goodale estimated that 95% would flow to individuals 
and families, with two-thirds to those earning under 
C$60,000 a year. 
 
¶6.    CORPORATE TAX RELIEF:  The update also promises a 
reduction of corporate income tax to 19% from 21% by 2010, 
and elimination of the corporate surtax (value:  C$2.6- 
billion over five years).  The document also promises 
elimination of federal tax on capital assets in 2006, two 
years ahead of schedule (value:  C$1 billion over three 
years), and extension of carry-forward periods for business 
losses and investment tax credits.  Goodale also highlighted 
his hope that there will be "good progress" on tax treaty 
negotiations with the U.S. this winter. 
 
¶7.   SPENDING INITIATIVES:  In order to balance its platform 
politically, the Liberals included spending initiatives 
designed to appeal to the left wing of its party and help to 
placate the provinces, including a C$1 billion one-year 
investment in universities and colleges, C$2.1 billion over 
five years in aid to post-secondary students, C$3.5 billion 
over five years for work training programs and C$1.3 billion 
over the same period to assist immigrant settlement. 
¶8.   TRADE PROMOTION:  In keeping with the government's 
perennial refrain of diversifying Canada's trade relations, 
the update promises C$485 million over five years for a "new 
international commerce strategy" for "priority markets such 
as China and India," and C$590 million over five years to 
develop west coast port and rail infrastructure to 
facilitate trade with Asia. 
¶9.  CURRENT ECONOMIC CONDITIONS:  The meat of the economic 
update is impressive.  Real GDP growth in Q2 2005 was 3.2%, 
up from 2.5% in the previous two quarters.  Net exports 
continue to rise despite the continued strength of the 
Canadian dollar, and domestic demand is solid.  Unemployment 
continues to decline and, at 6.6% has reached its lowest 
level in 30 years.  Corporate profits are at 14% of GDP, 
also a 30-year record.  Interest rates remain low and 
inflation, while rising on the back of higher commodity 
prices, is within the target range. 
¶10.  ECONOMIC ASSUMPTIONS:  The GOC bases its update on what 
it says are private sector economists' predictions of real 
GDP growth of 2.8 per cent in 2005, 2.9 per cent in 2006 and 
3.1 per cent in 2007.  The GOC cites major risk factors as 
being (1) further increases in energy costs, and (2) further 
depreciation of the U.S. dollar against all currencies 
including the Canadian dollar, which would bring further 
challenges for Canadian exporters.  Goodale touted the 
Liberals' eight consecutive annual budget surpluses and said 
that for planning purposes, the GOC expects the following 
fiscal surplus in coming years: 
2005-06     $8.2 billion 
2006-07     $9.2 billion 
2007-08     $9.5 billion 
2008-09     $7.9 billion 
2009-10     $8.4 billion 
2010-11    $11.3 billion 
¶11.  COMMENT:  The Liberal Party is stressing that all these 
initiatives could be jeopardized by early elections. 
Although specific programs and proposals may die should the 
government fall, Canada's solid fiscal performance should 
continue.  All parties, whether on the left or right, claim 
to support prudent deficit-free fiscal policy and continued 
debt reduction.  The differences in platforms mainly lie in 
the speed and nature of tax cuts and the focus of spending. 
WILKINS