Cablegate: Canada's Federal Budget Provides Lots of Cash To

DE RUEHOT #0524/01 0801754
R 211754Z MAR 07





E.O. 12958: N/A
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 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:

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: 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

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.


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