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R 211754Z MAR 07
FM AMEMBASSY OTTAWA
TO RUEHC/SECSTATE WASHDC 5239
INFO RUEATRS/DEPT OF TREASURY WASH DC
RUCPDOC/USDOC WASHDC
RUCNCAN/ALL CANADIAN POSTS COLLECTIVE

UNCLAS SECTION 01 OF 02 OTTAWA 000524 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR WHA/CAN 
TREASURY FOR INTERNATIONAL AFFAIRS (FAIBISHENKO) 
COMMERCE FOR 4320/ITA/MAC/WH/ONIA (WORD) 
 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV CA
SUBJECT:  Canada's federal budget provides lots of cash to 
provinces, includes benefits for American interests. 
 
REF: Ottawa 505 
 
¶1. (U) Summary: Canadian Finance Minister Jim Flaherty laid out the 
government's budget on March 19 with the lion's share of new 
spending, C$39 billion, directed toward the provinces in the effort 
to create 'Fiscal Balance' in the federation.  As expected, it is an 
"election" budget crafted to provide benefits to many segments of 
the Canadian public in order to help the Tories win a majority in 
the next election.  The budget also included several measures of 
specific interest and benefit to the United States, including 
elimination of withholding tax on interest paid to all 
non-residents; doubling to C$400 the value of goods that may be 
imported duty- and tax-free by returning Canadian residents after a 
48-hour absence; and providing C$11 million over the next two years 
to clean up contaminated sediment in eight areas of concern 
identified under the Canada-United States Great Lakes Water Quality 
Agreement.  The budget also confirms funding for Windsor-Detroit 
highways and bridge infrastructure. Opposed by the Liberals and the 
NDP, the budget nevertheless should have enough support from the 
Tories and the Bloc Quebecois to allow its passage through 
Parliament; the government will not fall on a budget no-confidence 
vote. Budget documents are available on-line at 
www.budget.gc.ca/2007/index_e.html  End Summary 
 
¶2. (U) The Tory budget, characterized by one media pundit as a 
"motherhood and apple pie document" will be supported by the Bloc 
Quebecois and therefore will have enough support to pass through 
Parliament despite the announced opposition of the Liberals and the 
NDP.  Thus, the Tory government is not expected to fall next week on 
a no-confidence vote triggered by this budget. 
 
Major Fiscal Elements of the Budget 
 
¶3. (U) The Harper Government's budget announcement of March 19 noted 
that the overall fiscal situation is stronger than projected at the 
time of the November 2006 Economic and Fiscal Update, due to a 
combination of higher revenues and lower expenses.  Partly as a 
result, Federal revenues as a share of GDP are projected to decline 
from 16.2 per cent in 2005-06 to 15.5 per cent in 2008-09. 
 
¶4. (U) For FY 2006-07 (which ends on March 31), the Government is 
planning to reduce the federal debt by $C9.2 billion.  Combined with 
last year's $C13.2-billion surplus, federal debt will have been 
reduced by $C22.4 billion over two years.  The Government is 
planning on annual debt reduction of at least $C3 billion in 2007-08 
and 2008-09, and remains on target to lower the federal debt-to-GDP 
ratio to 25 per cent by 2012-13.  The government, with this budget 
plan, will direct over $C1 billion per year in debt interest savings 
to ongoing personal income tax reductions. And the Government will 
limit growth in program spending, on average, to below the rate of 
growth in the economy. 
 
¶5. (U) Detailed analysis of economic developments and prospects can 
be found at:  http://www.budget.gc.ca/2007/bp/bpc2e.html 
 
Lots of Money to the Provinces, but not everyone is pleased 
 
¶6. (U) A cornerstone element of the budget is the transfer of C$39 
billion over the next seven years by the federal government to the 
provinces and territories.  A key objective of this fiscal transfer 
is 'long-term, predictable funding for infrastructure' which will 
see federal support grow from C$3.2 billion per year when the Tories 
came to power last year, to nearly C$5.7 billion per year by 
Qcame to power last year, to nearly C$5.7 billion per year by 
2013-14.  The Tories point out that this will add up to more than 
C$16 billion in new funding for infrastructure (roads, mass transit, 
water works, sewers and so on) over the next seven years.  Indeed, 
according to the budget plan, cash funding to provinces and 
territories, which stood at C$43 billion per year when the 
Conservatives took office in 2006, will be at least C$18 billion 
higher in 2013-14.  Combined with the money, however, is a promise 
by the Tories to meddle less in the policy affairs of provinces by 
focusing its spending in core areas of federal responsibility 
(presumably such as defense and national security) rather than in 
provincial matters such as health and education.  That is, the 
provinces will still get cash transfers, from equalization and the 
'Canada Social Transfer', infrastructure grants and other mechanisms 
but with fewer federal dictates on how the money it is to be spent. 
 
 
¶7. (U) Despite this seeming magnificent largesse, however, not all 
provinces are greeting the budget with pleasure.  By all accounts 
Quebec and Ontario are pleased, indeed many observers see the new 
funding as an attempt to influence the Quebec provincial election on 
March 26 (see reftel) but the premiers of Saskatchewan and 
Newfoundland and Labrador have both characterized the budget's plan 
 
OTTAWA 00000524  002 OF 002 
 
 
for provincial transfers as a 'betrayal'.  This is due to the fact 
that both provinces have growing revenue streams from natural 
resource royalties and in recognition of those monies the federal 
government plans to reduce equalization payments to the provinces. 
 
 
¶8. (U) Comment: The Conservative government's stated approach is to 
have clearly delimited provincial and federal areas of 
responsibility and limit federal spending activity to within its 
agreed upon purview.  Given the relative weakness of the central 
government in Canada, past federal governments tried to implement 
national policies by using the federal purse to co-opt, coerce, or 
downright buy provincial acquiescence on federal policy initiatives 
in what is known broadly as 'fiscal federalism'.  Upon taking power 
in 2006 the Tories identified concerns about how this approach 
blurred accountability to taxpayers and reduced clarity with respect 
to roles and responsibilities of each order of government which in 
turn helped create tension in the federation.  This budget is a 
fairly comprehensive attempt to address that concern. End comment. 
 
¶9. (U) The fiscal balance component of the budget is available at: 
http://www.budget.gc.ca/2007/themes/bkrfbse.h tml 
 
¶10. (U) Other aspects of the budget such as funding for environment 
and energy programs, science and technology, defense and national 
security and other sectors will be addressed septel. 
 
Good News for U.S. Priorities 
 
¶11. (U) The budget also included several elements that will yield 
benefits to American interests.  The government announced its intent 
to conclude negotiations on the Canada-US Tax Treaty soon and the 
related elimination of withholding tax on interest paid to all 
non-residents, to be phased in over three years following the 
signing of the new treaty.  The budget doubles the value of goods 
that may be imported duty- and tax-free by returning Canadian 
residents after a 48-hour absence, to C$400, effective March 20, 
¶2007.  And it reaffirms the federal government's commitment to 
construct a new border crossing at Windsor-Detroit including plans 
to cover 50 per cent of the cost of the access road from the new 
crossing to link up with Highway 401 (the major east-west artery of 
Ontario). 
 
¶12. (U) Other budget items which will have a near-term impact on 
American private interests include a "Cabinet Directive on 
Streamlining Regulation" that will come into effect on April 1, 2007 
and serve to focus resources on larger, more significant regulatory 
proposals, hold the government to account by establishing service 
standards, and create pressure for continual improvement through 
periodic reviews of the regulatory process.  And the budget 
allocates C$11 million over the next two years to clean up 
contaminated sediment in eight areas of concern identified under the 
Canada-U.S. Great Lakes Water Quality Agreement: Hamilton Harbor, 
Niagara River, Detroit River, St. Mary's River, Thunder Bay, 
Peninsula Harbor, St. Clair River and Bay of Quinte, as well as 
providing C$5 million over the next two years to the International 
Joint Commission (IJC) to carry out a study with the U.S. on the 
flow of water out of Lake Superior. 
 
Wilkins