Canada’s federal government brought down its 2008 to 2009 budget late yesterday afternoon. Two huge potential sources of regional conflict in the country are gathering on the horizon.

(1) Alberta is booming thanks to its mega energy projects and high oil prices. However, the good news on the oil front is turning Canada’s dollar into a petro-currency. The Canadian dollar is moving in tandem with oil prices. High oil prices are creating a heavy burden for the manufacturing sectors in Ontario and Québec through higher costs and the higher-valued Canadian dollar. There is considerable potential for growing resentment in the export-dependent manufacturing sector of the East.

(2) In its own turn, Alberta is likely to become increasingly resentful of any plans, other than its own, for carbon taxes or other environmental measures that will inhibit its energy sector. Such proposals by the federal government and/or other provinces are likely to be seen as interference of the sort that led to the much-despised National Energy Program in the early 1980s.

Did the budget address these issues?

Reaction: Last night’s federal budget was an odd mix. Large fiscal stimulus was provided in last fall’s economic statement. This included a further cut in the Goods and Services Tax (that took effect January 1 2008) and large corporate tax cuts to be phased in over the next several years. These measures left the government with little room to manoeuvre in the 2008 to 2009 fiscal year, proceeding from March 31. The projected surplus is $2.3 billion.

It has become political suicide to project a deficit – hence all the effort to “number crunch” a surplus. It used to be standard fiscal policy that governments would run a deficit when economic times are tougher. Depending on the extent of the economic downturn that we are heading into, a deficit may be what this government will be facing regardless.

As for points (1) and (2) above, limited action was taken. Some money is being earmarked for research and development in the auto sector. The goal is to improve average fuel economy for vehicles to 6.7 litres per 100 kilometres driven by 2020.

Some of the emphasis for helping the manufacturing sector was thrown back on the provinces. Tax experts have pointed out that provincial sales taxes are often applied on wholesale items as well as retail. This impacts unfairly on manufacturers’ costs. Fixing this problem is seen as a better first step than doling out money to specific industries in distress.

There was also some action taken on the environmental front. Money will be going to Atomic Energy of Canada Limited (AECL) to help with the development of the next generation of Candu nuclear reactors. And there is a commitment of $250 million towards a $3.8 billion clean-coal electric power project in southern Saskatchewan. This is a pilot project to study and promote carbon capture and storage (CCS). Besides lowering greenhouse gas emissions, the so-called “sequestration” of carbon dioxide underground will facilitate its use in enhanced oil recovery.

The major surprise in the budget, the tax-free savings account (TFSA) proposal, was aimed at individual taxpayers. The TFSA will allow individuals to place $5,000 per year in investment funds (stocks, bonds, saving accounts, etc.) where the income won’t be taxed. (RRSPs will remain stronger retirement vehicles because the actual contribution is tax-exempt.)

Maybe the major benefit of this Conservative budget is that the Liberals have already indicated that they will support it. As a result, it has become more probable that the minority government will continue to stand, at least into the fall. This will provide ongoing political stability as the economy heads into some choppier economic waters.

Alex Carrick

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