Flaherty offers more restraint than stimulus

Giving his economic mandate in the midst of a global financial meltdown, Federal Finance Minister Jim Flaherty warned that the prospects of economic growth were the lowest since 1993 and that Canada could face a deficit — but not a structural deficit.

Resisting the opportunity to turn an economic update into a mini-budget — as has happened in the past, Flaherty announced a series of spending cuts as well as reiterating tax and lending measures already taken.

He noted that two years of tax cuts have amounted to a fiscal stimulus of $31 billion — a sum equal to 2% of GDP. While insisting that Canada’s banking system is “mature,” he also pointed out the purchase of mortgage pools through the Canada Mortgage and Housing Corporation, the Canadian Lenders Assurance Facility to backstop wholesale borrowing by financial institutions and increases in the borrowing authority of Export Development Canada (EDC) and the Business Development Bank of Canada (BDB) — a nearly $4 billion boost to borrowing in Canada.

Both EDC and BDB will receive $350 million in equity injections to support loans for exports and for small businesses.

To restrain government spending, as expected, Flaherty announced the elimination of the $1.75 per voter subsidy to political parties, starting April 1.

In addition, he said, “We are directing government ministers and deputy ministers from every single department and agency of the Government to rein in their spending on travel, hospitality, conferences, exchanges and professional services. This includes polling, consultants and external legal services.”

Flaherty also expects a five-year expenditure review to yield savings of $15 billion.

But he went further, freezing public sector wage increases at 2.3% for this year and 1.5% for the next three years. He also suspended the right to strike for public workers until 2011.

In addition, instead of having separate litigation for pay equity settlements, Flaherty intends to introduce legislation to make them an integral part of collective bargaining, to avoid what he called “double pay equity,” as new claims arise.

For seniors who have seen asset values collapse in the RRIFs, Flaherty proposes a one-time 25% reduction in the minimum withdrawal amount for this tax year. If a senior were required to take $10,000 out next, this measure would reduce the withdrawal to $7,500.

RRIF holders who withdraw more than the reduced 2008 minimum amount will be permitted to re-contribute the excess to their RRIFs until March 1, 2009, or 30 days after this proposal is enacted, whichever is later.

Similar rules will apply to those receiving variable benefit payments under a money-purchase Registered Pension Plan. Flaherty has estimated this will cost the federal government about $200 million.

Feedback on the RRIF initiative was mixed. “Basically the government has allowed seniors to reduce their 2008 withdrawals by 25%,” says Karen Atkinson, tax partner at Ernst & Young.

“That’s what I would classify as a very minor tax element of the stimulus. Many people’s retirement funds have fallen substantially in value due to market conditions, so this is a way of saying ‘we recognize that, so we’re not going to force you to take as much money out of your retirement fund.’ This will alleviate the personally income tax burden of many seniors.”

Adrian Mastracci, portfolio manager, KCM Wealth Management Inc., noted that he “would like to remind investors is that there is no reason to convert RRSPs to RRIFs until age 71, unless there is need to establish pension income that qualifies for the $2,000 tax credit.”

As for pension plans, the government will extend the period to return to solvency from five years to 10 years, providing the plan sponsor obtains a letter of credit for the five-year period or the agreement of plan members and retirees.

A poll conducted by McAllister Opinion Research and released this morning claimed that 57% of Canadians would support government spending increases to stimulate the economy.

When it comes to bailing out the Big Three automakers, Western Canadians were the most opposed, at 57%, while 52% of Ontarians were against such a plan. Support was higher in Quebec and Atlantic Canada, with 52% in favour in each region.

(11/27/08)