May 2010

MAC Economic Commentary

The good, the bad and the need for more: Federal Budget 2010 tabled

By P. Stothart

Federal Finance Minister Jim Flaherty tabled Budget 2010 on March 4 — on the heels of a two-month prorogation of Parliament and the previous-day’s delivery of a Throne speech. The budget was prepared in a context where global economies seem to be recovering from the turbulence of the past 18 months. Real Canadian GDP declined by 2.5 per cent in 2009 and, according to budget forecasts, is expected to increase by 2.6 per cent in 2010 and 3.2 per cent in 2011.

The main thrust of Budget 2010 was to deliver the second year of Canada’s Economic Action Plan. The government has been actively communicating its view that stimulus spending through the plan’s first year played a role in Canada’s economic recovery. While the degree of correlation between the two remains unclear, it is evident that the massive program spending increases announced a year ago (from $207 billion in 2009 to $229 billion in 2010) has contributed to the largest government deficit in Canadian history — a formally confirmed $53.8 billion in 2009-10. Budget 2010 outlines a further $19 billion in new federal stimulus efforts consisting of a combination of income tax measures, training and Employment Insurance benefits, infrastructure spending, innovation support and regional spending.

The following key measures in Budget 2010 are relevant to the Canadian mining industry:

  • The temporary 15 per cent Mineral Exploration Tax Credit is an incentive available to individuals who invest in flow-through shares to finance mineral exploration. Budget 2010 extends the credit for an additional year, until March 31, 2011. Funds raised with the credit could therefore support eligible exploration until the end of 2012.  
  • The government is reducing Canada’s corporate income tax rate from 22 per cent in 2007 to 15 per cent in 2012 — a previously announced schedule that is confirmed in Budget 2010 as continuing on the same timetable. 
  • Budget 2010 provides $12 million over two years to Natural Resources Canada to renew the Targeted Geoscience Initiative (TGI), with a focus on developing new ways of exploring for deeper mineral deposits. The TGI is an effective complement to the larger Geo-mapping for Energy and Minerals program announced two years ago. 
  • As noted in the Throne speech, the government intends to liberalize foreign investment rules in Canada’s uranium sector to ensure that growth is not hampered “by unduly restricting foreign investment.” It remains unclear whether the government will seek foreign reciprocity in this regard, as was recommended in the 2008 Competition Policy Review Panel report. 
  • The government also committed in the Throne speech to “untangle the daunting maze of regulations that needlessly complicates project approvals” in Canada’s resource sector. Budget 2010 includes three partially relevant measures in this regard, namely: $11 million over two years to Indian and Northern Affairs Canada to support the acceleration of the review of resource projects in the North; $2.8 million over two years to the Canadian Environmental Assessment Agency (CEAA) to support project-related consultations with Aboriginal Canadians; and delegating responsibility for conducting environmental assessments from the CEAA to the National Energy Board and to the Canadian Nuclear Safety Commission for relevant energy projects.

On balance, MAC welcomes these commitments and views Budget 2010 as being appropriate for the times. However, there are some areas where further details and evidence of progress will be required in the coming months. For example, the budget is silent regarding funds for the nascent Canada Mining Innovation Council, which Natural Resources Canada has been actively promoting over the past year. As well, details regarding how the government plans to untangle the maze of needless project approval regulations and processes are also required.

The coming year may also make more evident the need for a credible plan to return the large federal deficit to a balanced position. There is a three-point plan outlined in Budget 2010 to return to balance as the economy recovers, although it draws primarily upon assumptions of revenue growth while ending some stimulus spending, capping growth in some programs, and introducing some symbolic measures. It should be noted that falling just one per cent short of economic growth projections would add a further $3 to $4 billion onto the federal deficit. The Parliamentary Budget Officer is already on record as estimating a structural deficit approaching $20 billion per year.

Beyond this, Canada faces the challenge of an aging society, with increased demands on healthcare and other services and federal transfers. Budget cycles of past decades have shown that weaning governments off deficits and debt financing can be a difficult political task — the last time Canada entered a deficit situation, it took 22 years to return to a balanced budget. The longer Canada takes to return to a balanced fiscal position, the greater the risk of mounting interest rates and inflation — none of which would be positive for business investment or for job creation.

Paul Stothart
Paul Stothart is vice-president, economic affairs, at the Mining Association of Canada. He is responsible for advancing the industry’s interests regarding federal tax, trade, investment, transport and energy issues.

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