Big spending is the main theme of Budget 2009! This comes as no surprise given the many details that were “leaked” over the course of the past week, say analysts at the Conference Board of Canada. Here are some highlights of the Board’s commentary on the budget. The full report can be viewed online at http://conferenceboard.ca.
Budget 2009 announced that the federal government will spend just over $43 billion on economic stimulus, spread out over the course of the next four years. The effectiveness of these recession-fighting measures will depend on how quickly programs can be implemented, as well as their respective impact on stimulating economic growth and job creation. In concert with other big stimulus packages around the globe, the hope is that the collective government action will serve to break the recession cycle and pull us back to positive growth.
Many of the measures in this year’s budget are aligned with our own thinking and suggestions on how to mitigate the effects of the current recession. Indeed, the budget includes very specific measures that The Conference Board of Canada had proposed, including a boost to Employment Insurance coverage, targeted training programs for the unemployed, and increased financial support to low-income Canadians through the Child Tax Credit and the Working Income Benefit.
Moreover, the Board had proposed increased infrastructure investment on “shovel-ready” projects that have already passed all regulatory hurdles. This could be accompanied by a commitment to boost infrastructure spending over the medium term. Indeed, the federal government has gone above and beyond our expectations on this last item. The budget is heavily weighted toward construction, with close to 50% of fiscal stimulus over the next two years geared to public infrastructure and housing.
Business tax relief
Budget 2009 extends modest fiscal stimulus to businesses, with the total increase in outlays ranging from $385 million in fiscal year 2009-10 and falling to $135 million by 2013-14. Among the measures included in Budget 2009 are:
-A permanent increase in the level of small business income eligible for the reduced federal tax rate of 11%—from $400,000 to $500,000, effective January 1, 2009.
A temporary 100% capital cost allowance (CCA) rate for computers acquired after January 27, 2009 and before February 1, 2011.
-An extension of the temporary 50-per-cent straight-line CCA rate to investment in manufacturing or processing machinery and equipment made in 2010 and 2011.
-The repealing of the interest deductibility constraints as laid out in section 18.2 of the Income Tax Act.
-The provision of some $440 million in tariff savings for Canadian industry over the next five years through the discontinuation of tariffs on a range of machinery and equipment.
The Department of Finance relies on a consensus of private sector forecasts to provide the economic indicators required in producing budgetary projections. The consensus outlook behind the current budget estimates is based on the third-quarter release of the National Income and Expenditure Accounts by Statistics Canada and was updated as of January 16, 2009
The consensus of private sector forecasts calls for real GDP to contract by 0.8% in 2009, a significant revision from the 0.3% growth expected in November’s Economic and Fiscal Statement. Rapid deterioration of global economic conditions has also caused a downward revision in the forecast for 2010, from 2.6% growth to the current forecasts of 2.4%.
The outlook for price inflation has also slowed since the Economic and Fiscal Statement, mainly b
ecause of weaker commodity prices related to the weaker outlook for global economic conditions. As a result, the GDP deflator is now expected to contract 0.4% in 2009, followed by growth of 1.7% in 2010. Consequently, the private sector consensus forecast has nominal GDP falling 1.2% this year, a significant 2 percentage points lower than expected just two months ago.
Based on these projections, nominal GDP (which is the broadest measure of the country’s tax base) will be $25 billion lower in 2009, and $30 billion lower in 2010 than was expected in the Economic and Fiscal Statement.
The risks to the global economy are particularly important to Canada, since the economic turmoil has led to low and volatile commodity prices. There is considerable uncertainty about how commodity prices will affect nominal GDP growth. Overall, there is significant downside risk to the nominal GDP forecast mentioned above, which could potentially reduce the projected level of budgetary revenues.
In light of these risks, when drawing up its budget planning assumptions, the Department of Finance decided to adjust downward the private sector forecast for nominal GDP. The planning assumption for nominal GDP in 2009 is a contraction of 2.7%. This will leave nominal GDP $30 billion lower in 2009 and 2010 than projected by private sector forecasters, and approximately $60 billion lower in each year than was forecast in November’s Economic and Fiscal Statement.
The Conference Board’s own forecast is more optimistic than what is contained in the 2009 federal budget. Our forecast calls for real GDP to contract 0.5% in 2009, followed by a strong rebound of 3.6% in 2010. Our stronger outlook for real GDP results in a more positive outlook for several key industries. Strong domestic demand will also help the Canadian economy continue to weather the storm south of the border.
The Conference Board’s forecast of price inflation is quite similar to that of the 2009 budget. Consequently, our forecast of nominal GDP is slightly higher in 2009 with a contraction of only 1%, and then substantially higher in 2010, with growth of 5.6%.
© Copyright 2009 The Conference Board of Canada, Ottawa ON.