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POSTED AT 6:46 PM EST    Monday, December 10
Budget aims for perfect balance
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Globe and Mail Update

Ottawa — The inevitable rainy day has arrived and Finance Minister Paul Martin has raided the pot of cash he has carefully stashed away each year for just such a downpour.

If he has done his sums right, he will still wind up this year — and each of the next two — with tiny surpluses. But in a new twist on the old accounting rules that he has used to have fun with figures, even those paltry amounts will be hived off into new funds where they can be used to finance infrastructure spending and aid for Africa. After four consecutive surpluses, culminating in one that hit a record $17.1-billion last year, the bottom line consists of a string of goose eggs, zero in the current fiscal year that ends next March 31 and zeros in each of the two years after that.

There was almost nothing in yesterday's budget to stimulate an economy on the ropes. The new spending measures and minimal tax relief amount to $2.7-billion this year — equal to a mere 0.2 per cent of a $1.1-trillion economy. Small businesses will be allowed to defer $2-billion in tax payments for six months, though that will only add to their tax bill further down the road when the grace period expires.

But then, Mr. Martin didn't have much room to play with. In the first seven months of this fiscal year, Ottawa ran up a cumulative surplus of $13.2-billion, which sounds sizeable, but is certain to erode quickly. The weakening economy is already cutting into tax revenues and higher spending, for things like employment insurance, is pushing up costs.

As recently as October, this year's surplus looked as if it would come in at only $7.3-billion. By budget day, the deteriorating economy had carved that down to $6.2-billion. Yesterday, his new measures pulled the prospective surplus down to $1.5-billion, which he plunked into his contingency fund. By the end of the year, even that money will disappear.

For Mr. Martin, this budget marks a break from the hallmarks of all his efforts since 1993. Pride of place has always gone to what Mr. Martin has called his prudence measures. No matter how the economy looked, he typically made allowances for weaker-than-expected growth and higher-than-expected interest rates and, for good measure, he tucked money into the contingency fund.

When he first made a projection for this fiscal year — back in February, 2000 — there was a $5-billion cushion, $2-billion for economic factors and $3-billion for the reserve. Now the economic cushion is gone — thanks to the recession — and the reserve has been cut in half. Craig Wright, chief economist at Royal Bank of Canada, was sanguine about the now featherless cushion. "That's what it was there for."

The new accounting twist is an amendment to a trick Mr. Martin has been using for years. As he approached the end of fiscal years during the good times, he faced surpluses that were bigger than previously expected. But it was always too late to use them up quickly by cutting taxes and too late even to rush the money out in new spending by the end of March. His solution was simple: Create special funds — like the Foundation for Innovation or the Millennium Scholarship Fund — toss the money over to them and let them spend it in an orderly fashion over the next few years.

Last year, when the economy was in its final big boom year and swelled federal revenues, he miscalculated and wound up with a surplus that was probably bigger than Mr. Martin wanted. Even he hadn't expected the final rush of revenue, which — under the accounting rules — went to pay down the debt because it couldn't be spent.

This year, he has found a way around that problem. Ottawa is setting up two new foundations (bringing the total to 11) that will get money if there's enough left in the kitty at the end of the year; the Stratetic Infrastructure Foundation will get $2-billion, the Africa Fund $500-million. This adds up to more than the $1.5-billion that the budget says will be left at the end of the fiscal year, so the funds might not get that much this year. However, but the government promised to add more money in the future to get them up to speed.

The auditor general won't like it — and the budget concedes this point — but Mr. Martin argues that it's a legitimate way of managing the taxpayers' money. Indeed, he's so fond of the idea that the government now reserves the right to wait until it finally closes the books on the old fiscal year (usually six months after it ends) before deciding how much money to hand over to the special funds. Previously, it had to make the decision by March 31. Even without his prudential cushions, Mr. Martin might be lucky enough to wind up with the books so much in the black that he can finance his new funds and still have a bit left over for debt repayment. But don't count on it. This budget aims for perfect balance and Mr. Martin has given himself the tools to ensure that precise outcome.

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