Government surplus shrinks by $2.7 billion

Government surplus shrinks by $2.7 billion

Updated Fri. Dec. 21 2007 1:14 PM ET

The Canadian Press

OTTAWA -- Retroactive tax cuts introduced in October by Finance Minister Jim Flaherty have had a dramatic impact on the government's budgetary bounty, reducing the accumulated surplus by $2.7 billion after recording the first monthly deficit of the current fiscal year.

The government reported Friday that its accumulated surplus for this fiscal year has shrunk to $6.6 billion for the first seven months of the fiscal year as of the end of October, down from the $9.3 billion at the end of September.

This marks the first time during the 2007-2008 fiscal year that the government has recorded a monthly deficit, and it is almost entirely due to a $2.5-billion adjustment to revenues as a result of Flaherty's Oct. 30 mini-budget.

"These measures consist of the reduction in the lowest personal income tax rate from 15.5 per cent to 15 per cent and the increase in the basic personal amount to $9,600, both effective January 1, 2007,'' the finance department reported.

The mini-budget also included cuts to corporate taxes and a reduction in the GST by one percentage point, but those measures do not go into effect until Jan. 1, 2008.

Overall, budget revenues in October decreased by $1.7 billion, or 9.2 per cent, and program spending increased by $1.7 billion, or 11.3 per cent, on higher transfer payments and departmental operating expenses.

Corporate income tax revenues rose $0.3 billion, or 12.6 per cent.

For the fiscal year so far, corporate taxes are up $3.3 billion, or 19.9 per cent, reflecting the ongoing profitability of Canada's businesses.

"The exceptionally strong growth to date also reflects tax remittance patterns last year, when corporations on average underpaid their tax liabilities during the first part of the fiscal year, but then made up this difference with significant settlement payments in February and March 2007,'' said the department.

As a result, it said the high growth rate of corporate receipts is expected to dissipate in the last quarter of the fiscal year.

The year-to-date surplus, while considerably smaller than last month, is still $200 million higher than during the same period last year when the final surplus totalled $13.8 billion.

And despite the adjustment, revenues were still $6.8 billion more than during the first seven months last year, a 5.3 per cent increase.

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Experts say PM's remarks suggest a tame budget

Updated Fri. Dec. 21 2007 7:44 PM ET

CTV.ca News Staff

Stephen Harper's gloomy forecast of economic turbulence in the year ahead is likely meant to cool expectations before the release of a new budget, financial experts said Friday.

Don Drummond, TD Bank Financial Group's chief economist, described Harper's remarks as "political conditioning" ahead of a tame budget next year.

"We are so used to, in Canada, to have blockbuster budgets that always have billions and billions of dollars in new spending, or billions of dollars in tax cuts, and I just don't think we're going to have that in 2008," Drummond told CTV's Mike Duffy Live.

"If you don't want to get nasty surprises when you release a document, you try to do pre-conditioning."

During year-end interviews, Harper said there would be no more federal tax relief in 2008. There would also be no major spending increases either, as the government focused on cutting debt.

He said a cautious fiscal policy would be needed to combat a global slowdown and a fragile U.S. economy, which is expected to impact Canada.

"There is no way we can be completely insulated from what is going on in the United States or in the global economy," Harper told CTV News' Chief Anchor and Senior Editor Lloyd Robertson, and Ottawa Bureau Chief Robert Fife on Thursday.

Drummond said his expectation is that the Canadian economy will grow about 2 per cent in 2008 -- compared to the usual growth of 2.75 or 3 per cent.

"It's definitely weaker than the norm, but it's not a disaster -- certainly not a recession by any means."

Bill Robson, president and CEO of the C.D. Howe Institute, agreed that Harper overstated the expected troubles. He said if Harper limits spending now, there will be money to spend later.

"The economy is going to be feeling a little bit of a damper from the U.S., but . . . there are a lot of signs of strength," Robson told CTV's Mike Duffy Live on Friday.

Robson said that he expects the Tory's announced cut to the GST to proceed as expected in January, but new spending will be minimal. He said Harper will likely hold something back in case an election is called.

"I think he will be looking at the personal income tax side and wondering if there's something extra he can do there," said Robson. "You want to have that in your holster."

While contributors to the United States' weak economy - specifically weak housing markets and sub-prime mortgage lending -- aren't taking the same hit in Canada, Drummond said our economy will feel some of the pinch. Seventy-five per cent of Canada's exports are to the U.S., he said.

Drummond said regions such as the manufacturing hotbeds of Quebec and Ontario will be hurt worse.

Reports released Friday by Statistics Canada underlined the anticipated economic slowdown, saying Ontario's declining retail sales in October virtually offset any national sales gains.

A 0.5 per cent decline in Ontario -- which represents about 35 per cent of Canada's sales -- cooled spending growth to only 0.1 per cent for the month of October.

The International Monetary Fund says Canada's economy in 2008 will grow less than the 2.3 per cent it forecast at the end of 2007's third quarter.