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Canada To Extend Aid To Struggling Manufacturers

Finance Minister announces cautious budget for economic downturn and will extend capital writeoff program for embattled manufacturers, including the forest industry.

OTTAWA (AP) — Finance Minister Jim Flaherty said he will hand down a ''cautious'' surplus budget for tough economic times on February 26, but hinted there would be at least modest tax cuts for Canadians.

The finance minister on Monday confirmed the worst-kept secret in Ottawa — the date of his third, and with the Liberals threatening to bring down the minority Conservatives, possibly his last budget before a general election — vowing he would not introduce major spending and tax measures that would send the government into a deficit.

''The U.S. economy is slowing significantly . . . so I'm being cautious and the budget will reflect that caution,'' he said.

''We have some fiscal room, but it's tight, particularly in the next two years.''

But still there are several voter-friendly measures that are likely to be in the budget, sources say.

Sources have told the Canadian Press the budget will extend the capital writeoff program for embattled manufacturers, including the forestry industry, from the current two years to five, a measure that will not cost the government until the next fiscal year.

A source who was asked for input during pre-budget consultations expects that any surprise environmental measure would focus on clean water. The Conservatives promised a national water strategy in last fall's throne speech but have been criticized since for announcing only piecemeal projects.

Also widely expected are measures to encourage research and development, although it appears the minister has ruled out a non-refundable tax credit which many industry groups have requested, as too open to abuse.

On the personal tax side, the minister will announce minor cuts stemming from savings the government will realize from paying down the debt by an announced $10 billion this year.

But many observers also expect Flaherty to lay down a marker for larger personal tax reductions over the next few years — similar to the schedule that will see the business tax rate reduced to 15 percent in 2012.

This would permit the Conservatives to boast of making deep personal income tax reductions in the present, while paying for the reductions in future years when projections suggest it will have the fiscal room.

The government is also believed to be looking for ways to encourage Canadians to save through such mechanisms as a lifetime retirement account that allows individuals to withdraw from the account tax free once they are retired.

Meeting with reporters after his announcement in the House, Flaherty would offer no specifics other than saying that despite lacking a large surplus to worth with, he was ''looking at some fiscal measures.''

Finance department estimates from the Oct. 30 mini-budget forecasts the government will have $1.4 billion in fiscal room for the 2008-09 fiscal year, and $1.3 billion in the 2090-2010 period, before rising to $4.5 billion, $7.2 billion and $9.8 billion in subsequent years. More money could be freed up by trimming government spending, which Flaherty said would also be outlined in the budget.

Doing nothing, or very little, is an unlikely option for a government staring the judgement of the voters in the face, said TD Bank chief economist Don Drummond.

''It would be shocking if they didn't do some new measure,'' he said.

Liberal leader Stephane Dion, who has suggested he is prepared to trigger an election if the budget doesn't meet his party's expectations, said the Liberals want targeted relief for the manufacturing and forestry sectors, measures to address poverty in the country and measures on the environment and climate change.

The NDP has made health care a top priority, particularly home care and the cost of drugs, along with education, child care and infrastructure improvements.

But Flaherty, who met with the opposition finance critics last week and said he expects to meet them again before Feb. 26, said some of the suggestions from the other parties would result in a deficit, which he said was not negotiable.

''I'm not going to be the finance minister that puts our country back into deficits,'' he said. ''You don't throw money around when times are tight ... especially now in a time of economic slowdown.''
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