OTTAWA - It will take years before the federal government can bring in the kind of historic tax reductions for ordinary Canadians that it delivered for businesses in October, says Finance Minister Jim Flaherty.
In an interview with The Canadian Press in his 19th floor office in downtown Ottawa, the finance minister said he understands that Canadians expect a Conservative government to bring in "long-term change, long-term broad based tax reductions''.
But while his Oct. 30 mini-budget set Canadian companies on track to be among the least taxed in the G7, reducing the corporate income tax to 15 per cent by 2012, it will take time for ordinary Canadians to see that degree of tax relief, he said.
"What Canadians expect from the Conservative government is that we will bring in long-term change, long-term broad based tax reductions,'' Flaherty said. "We've done it on the business side, we've done some on the personal income tax side, with more to be done.''
However, the finance minister acknowledged that won't be possible in 2008 because he does not expect the government to enjoy huge surpluses in the next few years, particularly after setting aside $10 billion for debt reduction during this fiscal year.
"The next couple of years are closer to the line, given the more moderate expectations with respect to economic growth,'' he explained. "But I still think we have the potential to do more on the personal income tax side...long term.''
Most forecasts show the Canadian economy slowing to more modest growth of between two and 2.5 per cent in 2008, in part because the expected slowdown in the United States economy next year will squeeze demand for everything from autos, auto parts, metals and minerals to oil, petrochemicals, coal and lumber produced in Canada.
With slowing Canadian growth and an expected drop in business profits, the federal treasury will likely see hundreds of millions and possiblly billions of dollars in lower corporate and personal tax revenues.
For Ottawa, the key change on personal income taxes so far into the two-year government's term has been a reduction in the low income tax bracket from 15.5 per cent to 15 per cent, restoring a cut first introduced by the Liberal government of Paul Martin two years ago. The government has fulfilled its campaign pledge to cut the GST to five per cent from seven per cent, in stages, however.
While he offered few hints at what would be in his budget this spring, Flaherty said there would be no major rescue mission for the battered manufacturing and forestry sectors.
He added what assistance could come would be minor and in the area of help for retraining displaced workers and in research and development measures to "to encourage increased acquisition of sophisticated technology to increase productivity''.
"I'm not in favour of Band-Aid solutions that have a very short shelf-life,'' he explained, saying that people who believe the problems in the sectors are short-term and caused primarily by the strong dollar are just plainly wrong.
"It's quite clear in forestry there is a longer term restructuring needed. There's more competition in the world, some of the mills in Canada are too small, in some cases there has not been adequate investment in new technology. The appreciation of the Canadian dollar does not help, but all those things were there before.''
In the auto sector, he said, one of Canada's main problems is that domestic assembly factories produce large, energy-inefficient vehicles such as trucks, SUVs and minivans at a time of low demand in the U.S., where more than three quarters of Canadian production is exported.
The minister's statements partially mirrored those of Prime Minister Stephen Harper during last week's round of year-end interviews in which he eschewed big tax cuts and spending because of the worsening economic prospects for the economy.
Flaherty was equally concerned about the extent of the downturn awaiting Canada in 2008.
While he would not say a recession was possible, he expressed fears the U.S. housing crisis is turning so serious that it will dampen consumer confidence and reduce demand for Canadian exports, particularly autos, lumber, construction materials and other forest products.
And he said Canada is facing it's own problems from the U.S. mortgage crisis with the difficulties in restructuring the $30 billion in frozen asset-backed commercial paper. The investors committee heading the restructuring mission finally got a deal last week, but only after missing a mid-December deadline and running into some resistance from at least one bank, Toronto-Dominion, which had balked at putting up loan commitments.
"I'm concerned,'' said Flaherty. "The downside risks have increased. There's not much question some financial institutions are going to take some hits in the balance sheets, some already have.''
But he said the government and the Bank of Canada have no role to play in bailing out financial institutions that have been caught up in credit mess, other than what the central bank has already done in providing additional cash injections into the financial system to get banks lending again.
"Are there any plans for the government of Canada to intervene in the asset-backed commercial paper market, the answer to that is no. Our role is to facilitate an orderly resolution of the ABCP''.
Flaherty revealed that he expects to bring in his third full budget in March, despite rumblings from the Liberal Party that it may be ready to defeat the minority Conservatives in February. The minister said he will not hurry up his next budget to beat the Liberals to the punch.
"It would be very difficult for us to have a budget in the early days of the new sitting, so if they decide to defeat us on something or other, then we'll be defeated,'' he said.
