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### Viewing cable 07OTTAWA524, Canada's federal budget provides lots of cash to

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
07OTTAWA524 | 2007-03-21 17:05 | 2011-04-28 00:12 | UNCLASSIFIED | Embassy Ottawa

`

    VZCZCXRO1625
    RR RUEHGA RUEHHA RUEHQU RUEHVC
    DE RUEHOT #0524/01 0801754
    ZNR UUUUU ZZH
    R 211754Z MAR 07
    FM AMEMBASSY OTTAWA
    TO RUEHC/SECSTATE WASHDC 5239
    INFO RUEATRS/DEPT OF TREASURY WASH DC
    RUCPDOC/USDOC WASHDC
    RUCNCAN/ALL CANADIAN POSTS COLLECTIVE

` `

    UNCLAS SECTION 01 OF 02 OTTAWA 000524

    SIPDIS

    SIPDIS

    STATE FOR WHA/CAN
    TREASURY FOR INTERNATIONAL AFFAIRS (FAIBISHENKO)
    COMMERCE FOR 4320/ITA/MAC/WH/ONIA (WORD)

    E.O. 12958: N/A
    TAGS: ECON EFIN PGOV CA
    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
    www.budget.gc.ca/2007/index_e.html  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:  http://www.budget.gc.ca/2007/bp/bpc2e.html

    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:
    http://www.budget.gc.ca/2007/themes/bkrfbse.h 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
    Ontario).

    ¶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.

    Wilkins

`