Canadian Budget for Fiscal 2010-11 Tabled in the House of Commons

• The federal budget deficit is projected to decline from $53.8 billion in 2009 to $49.2 billion in 2010-11, and achieve roughly a balanced budget by 2014-15.
• The second year of fiscal stimulus is on track with $19.2 billion in various stimulus programs, a decrease from $28.1 billion in 2009-10.
• Finance Canada's underlying assumptions are conservative: they are using average private sector forecasts for real growth of 2.4% in (calendar) 2010 and 3.4% in 2011.
• The federal debt-to-GDP ratio sees moderate upward pressure in 2009 and 2010 rising to about 35.4% in 2010-11, before declining gradually to about 31.9% in 2014-15.
• Recent measures to ensure the flow of credit will be reinforced, particularly the business credit availability program.
• A range of measures to increase the competitiveness of Canadian industry will be implemented, including eliminating all remaining tariffs on manufacturing inputs and machinery and equipment.
• Federal government red tape will be streamlined, and barriers to foreign investment will be further reduced.

Outlook

The Canadian economy kicked into recovery mode in the second half of 2009, following the path blazed by the recovery in the U.S. economy. Indeed, Canadian growth accelerated to 5% in the final quarter of 2009, and that was without any contribution from the inventory cycle. The stage is set for strong Canadian growth in the first half of 2010.

With this backdrop, the Canadian Finance Minister presented the fiscal 2010-11 budget to the Canadian House of Commons on March 4. Basically, this is a "steady as she goes" budget that stays on track for the second year of stimulus measures, ranging from personal tax cuts to infrastructure spending, housing incentives, and funding for science and technology.

The underlying growth assumptions for 2010 and 2011 are reasonable. IHS Global Insight is forecasting slightly stronger growth in 2010—near 2.8%—based on a strong finish to 2009 and relatively solid growth of 3.0% in the United States.

The budget attains fiscal balance over the next four years mainly through a freeze in spending by federal government departments. There are no tax increases.

Leveraging the nascent economic recovery, combined with the federal spending freeze and no tax increases, is ultimately a very sensible approach to achieve fiscal balance. In addition, the finance minister is moving forward in a number of key areas to improve Canadian business competitiveness, including eliminating remaining tariffs, reducing federal red tape, and further reducing barriers to foreign direct investment.

Bottom line: The underlying assumptions are credible, and the finance ministers' plan for medium-term fiscal stability makes a lot of sense. The Canadian dollar has been moving up lately on strong growth in Canada, and it could see further upward momentum in the second quarter of 2010 as the Canadian economy picks up speed.