Viewing cable 03OTTAWA500, CANADA'S FEDERAL BUDGET: PM CHRETIEN'S LEGACY --

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 04 OTTAWA 000500 
 
SIPDIS 
 
SENSITIVE 
 
DEPT FOR EB/IFD, WHA/CAN AND WHA/EPSC 
STATE PASS CEA FOR Randy Kroszner, FRB FOR C. BERTAUT 
STATE PASS USTR FOR RYCKMAN 
TREASURY FOR OASIA/IMI - HARLOW, MATHIEU 
USDOC FOR 4320/MAC/ON/OIA/JBENDER 
PARIS ALSO FOR USOECD 
CALGARY PASS TO WINNIPEG 
 
E.O. 12958: N/A 
TAGS: EFIN ECON ETRD CA
SUBJECT: CANADA'S FEDERAL BUDGET: PM CHRETIEN'S LEGACY -- 
"JEAN BILLIONAIRE"! 
 
REF: (A) Ottawa 2711 (B) Ottawa 3113 
 
¶1. (U) Sensitive but unclassified, please protect 
accordingly. Not for Internet distribution. 
 
Summary 
------- 
 
¶2. (SBU) Dubbed Prime Minister Jean Chretien's "Legacy" 
by Canadian analysts, the budget presented on February 18 
is the largest fiscal stimulus package since the Trudeau 
era 20 years ago, and the second largest spending program 
in 40 years. The "Jean Billionaire Budget", with C$14.3 
billion this year (FY03-04), and C$38 billion over the 
next five years, includes something for almost everyone 
but few surprises. (Note: using an exchange rate of 1C$ 
= 66 UScents, new spending FY2003-2004 would be US$9.4 
billion and over five years, US$25.1 billion.) Despite 
the 11.5% increase in spending (four times the rate of 
inflation) this is the GOC's sixth consecutive balanced 
budget and does provide for debt reduction. 
 
¶3. (U) Finance Minister John Manley was able to use his 
first budget as a launching pad in his bid to succeed 
Prime Minister Chretien. (Chretien has announced that he 
will step down in February 2004.) In his speech to 
Parliament, Manley stressed benefits for children, the 
homeless and First Nations (aboriginal) communities, 
saying "you can't have a world of peace unless you 
address the world of need." His speech emphasized 
commitment to making Canada a knowledge economy, and 
expressed the wish that the maple leaf, wherever it is 
seen in the world, will represent hope, compassion and 
determination. Manley also promised a thorough review of 
government programs and expects to reallocate C$1 billion 
a year to higher priority programs on a continuing basis. 
 
The Lion's Share for Health Care: 63% 
-------------------------------------- 
¶4. (SBU) As indicated in the Speech from the Throne (ref 
A) and called for in the November 2002 Romanow Report, 
health care spending takes the lion's share of the 
budget. Spending is slated to increase by C$34.8 billion 
over the next five years - C$8.96 billion this year alone 
- for 63 percent of total new spending of C$14.3 billion 
this fiscal year. Defense spending, in contrast, 
receives 0.8% of this year's spending, for a total of 
C$1.1 billion. Although the increase in defense spending 
is less than some had hoped, it reverses years of 
significant declines and is a big step in the right 
direction for Canada's military. End Summary. 
 
¶5. (SBU) Comment: As in past years, the GOC 
intentionally leaked many budget proposals. Financial 
markets had discounted the GOC's spending, and the 
Canadian dollar remained stable. Some analysts contend 
that the markets will ignore this budget because it can 
be viewed as "just a one-year change in policy" until the 
end of Chretien's tenure. With the generous spending to 
support the Prime Minister's swan song "wish list," 
Finance Minister Manley was able maintain Canada's image 
of fiscal prudence only in comparison to the fiscal 
deterioration of the rest of the G7. End Comment. 
 
Budget Overview: Risks are from the U.S. 
---------------------------------------- 
 
¶6. (U) Economic Assumptions: 
-- 3.2% real GDP growth in 2003 (highest in the G7) 
-- 3.5% real GDP growth in 2004 
-- Risks include uncertain economic recovery in the U.S. 
and geopolitical concerns, especially possible war in 
Iraq. 
 
¶7. (U) Fiscal Projections: The Sun Will Keep Shining 
--------------------------------------------- ------- 
 
-- Canada is the only G7 country to record a surplus in 
FY2000-2001 (C$15B) and FY2001-2002 (C$8.2B). The 
Liberal Party is committed to "balanced budgets or 
beyond" from this year (FY2002-2003) through FY2004-2005, 
a promise that has traditionally resulted in surpluses. 
 
-- Debt reduction payments of C$47.6 billion in FY2001- 
2002 lowered the federal debt-to-GDP ratio to 46.5%, from 
51.8% in the previous year. (The debt-to-GDP ratio is 
projected to drop to 40% by FY2004-2005.) 
 
-- The GOC's Contingency Reserve will remain at $3 
billion, while "Economic Prudence" will rise to C$1 
billion in this fiscal year and C$2 billion next fiscal 
year, from zero the past two years. Note: Economic 
Prudence is a reserve set aside for unforeseen factors 
that could undermine economic performance, such as global 
political and economic uncertainties. No funds were 
needed for "Economic Prudence" in the previous two fiscal 
years because the Canadian economy performed above 
expectations. End note. 
 
¶8. (U) Spending Initiatives: Something For Everyone 
--------------------------------------------- ------ 
 
Total new spending of C$25 billion over three years 
covers most sectors, although some, such as health care, 
have five-year spending commitments or longer. 
 
Health Care and Other Social Spending 
-------------------------------------- 
 
-- The C$34.8 billion committed for increased spending in 
health care over five years includes: 
 
-- A five-year C$16 billion Health Reform Fund for the 
provinces and territories to target primary health care, 
home care and catastrophic drug coverage. 
 
-- A C$9.5 billion increase in cash transfers to the 
provinces and territories over five years. 
 
-- An immediate investment of C$2.5 billion through the 
Canada Health and Social Transfer supplement (with 
details left to the discretion of the respective 
provinces). 
 
-- C$5.5 billion in health reform initiatives, including 
diagnostic/medical equipment and a six-week compassionate 
leave benefit under employment insurance. 
 
-- C$1.3 billion to support First Nations' health 
programs. 
 
-- C$5.6 billion in social spending for the homeless, 
childcare, and affordable housing. 
 
Defense, Security, Foreign Aid: Reversing decline 
--------------------------------------------- ----- 
 
-- An increase of C$800 million for Canadian military 
capabilities in each of the next three years. (Note: in 
his speech, the FinMin said "every year," without 
specifying a time limit. End note.) 
 
-- C$170 million this fiscal year for urgent capital 
requirements, maintenance of capital equipment, spare 
parts, the purchase of new capital equipment and other 
expenses. 
 
-- C$100 million to support the military commitment in 
Afghanistan ("Operation Apollo"). 
 
-- C$75 million in each of the next two years for the 
Security Contingency Reserve, to enable the GOC to 
respond to unforeseen security needs, including border 
security. 
 
-- Nearly C$500 million annually in foreign aid (an 8% 
increase), for a total of C$1.4 billion over the next 
three fiscal years. 
 
Sustainable Development (including Kyoto implementation): 
Still Vague 
---------------------------------------- 
 
The budget allocates C$3 billion to environmental 
initiatives, including: 
 
-- C$2 billion over five years to implement the Kyoto 
Accord; 
 
-- C$1 billion for other environmental measures. 
 
Note: There are still no details on how the Kyoto 
implementation funds will be spent. End note 
 
Refining the Tax System 
----------------------- 
Manley prefaced his comments on tax changes by saying 
this budget supports improved corporate governance and 
regulation. The budget will: 
 
-- Reduce the corporate tax rate to 21% from 28% over the 
next five years while making other changes to the 
corporate tax structure. 
 
-- Reduce the tax on resource income to 21% over five 
years. 
 
-- Raise RRSP and RRP (pension plan) contribution limits 
to C$18,000 over four years, and index the new limits. 
 
-- Eliminate the federal capital tax over the next five 
years, with medium-sized businesses benefiting first. 
(Initially, the capital threshold at which the tax 
applies will be raised from C$10 million to C$50 million 
effective in January 2004. As of January 2004, medium- 
sized businesses under the C$50 million threshold will no 
longer have to pay the tax. Second, the rate of the tax 
will be reduced in stages over a period of five years so 
that by 2008, the tax will be completely eliminated. No 
changes are proposed to the special capital tax on large 
financial institutions.) 
 
-- Reduce the airport security tax from C$24 to C$14 per 
round trip after March 1. 
 
-- Increase the film and video production services tax 
credit from 11% to 16% of qualified Canadian labor 
expenditures. The GOC will to continue to consult with 
the Canadian film industry to develop criteria for a 
streamlined mechanism for delivering the tax credit, 
which in turn could provide a refundable tax credit of 
25% of qualified labor expenditures for Canadian film or 
video productions. 
 
Other items 
----------- 
-- C$2 billion has been earmarked for "innovation and 
skills," such as research grants and scholarships. 
Manley highlighted in his speech that this year a greater 
proportion of scholarships will support social science 
scholars. He also stressed the allocation of C$114.5 
million over 5 years to support dual language 
proficiency. 
 
-- C$5.2 billion over six years in farm aid 
Cellucci