Canada's Economic Action Plan
Canada’s economic success has always depended on our ability to export our goods and services to other nations. Today, with the crisis in global financial markets and the economies of our major trading partners in steep decline, we face extraordinary difficulties, the likes of which have not been seen since the end of World War Two.
While many economists believe a turnaround in 2010 is likely, difficult conditions are expected to remain for the coming months. Our economy faces three major challenges:
Fortunately, Canada has a number of structural strengths that should allow us to manage through this period of economic weakness better than other countries. First, our financial system is the strongest in the world. Second, Canadian households and businesses are in much stronger financial positions than in most other industrialised countries – largely because our lending practices and housing markets avoided the excesses that occurred in those other countries. Third, the fiscal position of governments in Canada remains structurally solid.
Despite these strengths, Canada is clearly being affected by the cyclical downturn in the global economy, with both employment and output now falling. Canada’s Economic Action Plan (EAP) is designed to protect Canadians from the downturn and pave the way to recovery.
The economic slowdown began in 2007 with the freezing up of large segments of the global financial market and a sharp fall in US housing prices. From the outset of these difficulties, the Government of Canada has acted to minimise the harm to our economy while building for the future.
The Bank of Canada and the Government have acted throughout the period of economic weakness to improve access to financing for Canadian consumers, households and businesses. A significant milestone in this regard is the agreement to restructure non-bank asset-backed commercial paper in Canada, a singular achievement that enhances financial stability and the health of Canada’s capital markets.
Canada was one of the first countries to inject major fiscal stimulus into its economy to offset the downturn and encourage continued growth. On 30 October 2007, the Government introduced C$65bn in permanent tax reductions over this and the next five fiscal years. At that time, the Government stated: “Given this global economic uncertainty, now is the time to act…to make broad-based tax reductions that will strengthen our economy, stimulate investment and create more and better jobs.”
These tax reductions took effect just at the moment they were most needed, when the US entered recession in early 2008. The October 2007 permanent tax reductions continue to support growth and job creation today and will do so into the future.
The Canadian economy is also benefiting from previous investments in infrastructure and the resolution of fiscal balance between orders of government. For example, Budget 2007 set out a seven-year C$33bn plan to boost Canada’s public infrastructure – things such as the roads, bridges, sewer, water and public transit systems that support commerce – and provided long-term, growing transfer support to provinces and territories. With current federal transfer support at an unprecedented level, governments are in a position to work together on the current economic challenges.
Most recently, on 27 January 2009, the Government presented Canada’s EAP – the earliest budget in Canada’s history – to ease the impact of deepening global challenges on our economy and provide the solutions we need to secure our long-term growth and prosperity.
Canada’s EAP is an important contribution to the global response to the current economic downturn. The world economy is highly globalised. It is only by acting together to boost global economic growth that countries can derive maximum impact from their actions.
Canada’s EAP comprises five main elements:
In total, Canada’s EAP will provide about C$40bn over the next two years to support the economy and help create jobs. When combined with funds from expected partnerships with provincial and territorial governments, the total stimulus provided by the plan over the two years is almost C$52bn, or 3.2% of gross domestic product (GDP).
Canada’s EAP meets Canada’s commitments at the November 2008 Group of 20 (G20) leaders’ summit to provide timely stimulus to domestic demand, while maintaining long-run fiscal sustainability.
Canada’s EAP protects jobs and supports structural adjustment during this extraordinary crisis with C$7.5bn in additional support for sectors, regions and communities. Once the Budget Implementation Act 2009 receives Royal Assent, C$500m of the C$1bn Community Adjustment Fund will be available to support economic adjustment and diversification initiatives in communities hardest hit across Canada. The plan provides up to C$200bn through the EFF to improve access to financing for Canadian households and businesses.
The Canada Revenue Agency (CRA) is administering the increase in the amount of small business income eligible for the reduced federal tax rate to C$500,000, which took effect on 1 January 2009. It is also administering the temporary accelerated capital cost allowance rate for investment in computers, which took effect after 27 January 2009. Tariff eliminations came into force on a range of imported machinery and equipment on 28 January 2009.
The Industrial Research Assistance Programme will ramp up its support to small and medium-sized firms starting 1 April 2009, with a doubling of its contributions budget. The CRA will administer the one-year extension of the temporary Mineral Exploration Tax Credit when it comes into effect 1 April 2009.
The availability of financing support for businesses through Export Development Canada and the Business Development Bank of Canada has been expanded. Collaboration has been increased between financial Crown corporations and private sector lenders and credit insurers under the Business Credit Availability Programme. Consultations are underway with interested market participants on the design of the Canadian Secured Credit Facility.
It is vitally important for the private sector to continue to work closely with governments to ensure that all have the necessary information to make full use of the EAP. For example, the chartered banks are working with the Business Development Bank of Canada and Export Development Canada to maximise the flow of financing to businesses in Canada. The Government is concluding discussions with third-party organisations and finalising funding agreements with private sector partners who will be delivering components of the EAP, such as the Institute for Quantum Computing, the Canada Youth Business Foundation, the YMCA/YWCA and the Canada Health Infoway.
Stabilisation of the global financial system is a precondition for economic recovery globally and in Canada. Since the beginning of the crisis, governments around the world have taken extraordinary measures to address the problems in financial markets. However, there is still work to be done. Decisions taken in the coming weeks in the US and in other major economies to address problems in their financial sectors will be critical. The proper and timely implementation of such programmes is the key to restoring confidence in financial markets.
The G20 leaders are meeting in April to take stock of global economic conditions. In addition, leaders will review reports of working groups on financial sector regulatory issues, including the results of a working group co-chaired by Canada on enhancing sound regulation and strengthening transparency in the financial sector.
Looking ahead, the Government will report regularly to Canadians on the implementation of the EAP. Further reports will be issued in June, September and December. These will focus on substantive milestones – dollars spent and outcomes achieved. In the 2009 Economic and Fiscal Update, the Government will provide a comprehensive analysis of the impact of co-ordinated policy actions across all G7 countries, including Canada’s.
This is an edited version. See the full report at https://www.budget.gc.ca/2009/pdf/budget-planbugetaire-eng.pdf.