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Strong Economy Gives Canada Room for Tax Breaks in Mini-Budget

Theophilos Argitis
Bill Morneau

(Bloomberg) -- Recent turmoil in oil and financial markets aside, Canadian Finance Minister Bill Morneau’s budget update Wednesday will paint a rosy enough picture to finance tax breaks for corporations without fueling additional deficits.

The federal government will probably revise revenue projections upward by at least C$7 billion ($5.5 billion) over three fiscal years beginning with the current one, according to Bloomberg calculations. That’s thanks to a better-than-expected economic outlook and signs of stronger tax collection, and excludes higher revenue from a new carbon tax on some provinces.

The windfalls will give Justin Trudeau’s Liberals scope to provide some relief for Canadian firms looking for a response to extensive U.S. corporate tax cuts. All indications point to accelerated write-off allowances on capital investment, though that would mean passing up another opportunity to speed deficit reduction, with shortfalls running well above what the prime minister campaigned on three years ago.

“I’m not counting on seeing increased efforts to return to balance,” Paul Ferley, assistant chief economist at Royal Bank of Canada, said in a phone interview.

Still Spending

The fiscal update -- the most extensive set of revised projections outside the annual budget -- comes amid widespread calls to address the country’s waning competitiveness. But demands for costly support also have put the business community in an awkward situation, given they’ve been critical of the government’s deficit spending.

“The government is still continuing to spend at an enormous rate,” Perrin Beatty, chief executive officer at the Canadian Chamber of Commerce, said last week in an interview. “They’re caught between a rock and a hard place. The rock on one side is the need to take action to address some of these issues; the other is the lack of fiscal flexibility that they have.”

Trudeau’s government has been hesitant to rein in stimulus even with the economy largely at capacity, pointing to its success at bolstering the expansion. Any unexpected fiscal leeway -- such as the Liberals had prior to the previous budget -- has been spent, instead of used to reduce deficits.

Bigger Shortfalls

In its February budget, the government projected a shortfall of C$18.1 billion for the current fiscal year, C$17.5 billion in 2019 and C$16.9 billion in 2020. The Liberals, who came to power with a pledge to run C$20 billion in cumulative deficits over three years, are instead on pace to hit C$100 billion by 2021.

The finance department’s latest survey of private forecasts show an economy that will be about C$50 billion larger than projected in the three fiscal years between 2018 and 2020. That means revenue, which the government assumes will total 14.5 percent of output, should exceed forecasts by a cumulative C$7.3 billion over that time

In addition, the government has put aside a C$3 billion reserve for the current year, some of which could be used for new measures. There are also signs that tax collection is running at a faster pace than projected, with revenue up 8 percent in the first five months of the fiscal year versus projected 4.5 percent.

To contact the reporter on this story: Theophilos Argitis in Ottawa at targitis@bloomberg.net

To contact the editors responsible for this story: Theophilos Argitis at targitis@bloomberg.net, Chris Fournier, Stephen Wicary

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