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Flaherty hints at tax cuts in budget

The Canadian Press

OTTAWA — As retailers begin to tally up results from their year-end sales and forecasters agreed that the first part of 2009 will be painful, the government is looking for ways to stoke consumer confidence.

Finance Minister Jim Flaherty said Friday he's reviewing options for putting more money in people's pockets through tax cuts as part of a multi-billion dollar stimulus package that will include infrastructure spending and help for laid-off workers.

The comments come as the finance minister prepares for a second meeting with his freshly minted council of economic advisers next week and amid fresh evidence that Canadian consumers are growing more pessimistic.

Corporate tax cuts and the new tax-free savings accounts that came into effect on Jan. 1 will help stimulate the economy, Mr. Flaherty said Friday, but added he's considering other measures for the Jan. 27 budget.

“There are a couple of ways to stimulate the economy. One is spending on the infrastructure side and other ways. And tax reductions — leaving more money in people's pockets — is also stimulus to the economy,” Mr. Flaherty told reporters at a news conference.

“We've been reviewing other (tax) options,” he added.

Liberal Leader Michael Ignatieff recently warned that the budget will be Prime Minister Stephen Harper's “last shot” to show economic leadership or face losing a non-confidence vote.

The Liberals and NDP, with the support of the Bloc Quebecois, were prepared to topple the minority Conservative government in early December over perceived inaction on the stumbling economy, but Mr. Harper received a reprieve by shutting down Parliament until Jan. 26.

Mr. Flaherty was not specific about what he will propose in the budget — that Mr. Harper has said would result in a deficit of up to $30-billion — but said he will seek to support “people who are enduring the brunt of the recession ... with job losses and job retraining.”

Statistics Canada will provide an update on the unemployment situation on Friday when it releases its labour force survey data for December.

About 71,000 jobs were lost in this country during November, the biggest one-month drop since 1982, although the figures were skewed by unusually high employment in October due to temporary jobs related to the federal election.

Economist Dale Orr of IHS-Global Insight said the most effective form of tax cuts to stimulate the economy short-term may be through eliminating the five-per-cent federal goods and services tax for one year on big consumer items such as autos, furniture and appliances.

With consumers worried about their jobs, Mr. Orr said Canadians are more likely to pocket than spend any income tax reduction. And an across-the-board one-point drop in the GST would likely be more costly and less effective than a larger, targeted cut, he added.

“It's in the big items where you can actually change consumer spending,” Mr. Orr said. “If you save a few pennies on a cup of coffee, nobody is going to buy more coffee because it's lower.

“But if people are thinking (they) should get a new car this year or next, if (they) can save five per cent by buying it this year, it could be effective.”

Liberal finance critic Scott Brison said “the right tax cuts” can help stimulate the economy, but was not specific. The Liberals had opposed two previous cuts to the GST, arguing that reducing income tax would have been better for the economy.

Mr. Flaherty said he was concerned about the impacts on Canada of the sharply deteriorating global situation and that finance officials have been working throughout the holiday season on preparing a response in the budget.

The minister also said it was not a good sign that two new surveys released Friday found consumer confidence in Canada sinking to depths found in the United States, where the economy is faring far worse.

A Harris-Decima sponsored by Winnipeg-based mutual fund firm Investors Group, found 64 per cent of 2,000 respondents said they were feeling pessimistic about the economic outlook for 2009.

That's twice as high as the number of individuals who felt less confident about the economy in a survey last August and similar to the poor consumer confidence levels reported in the United States.

But the proportion of survey respondents expecting a deterioration of their own financial situation was unchanged at 18 per cent.

A separate poll from the Boston Consulting Group found that 62 per cent of the 1,000 Canadians surveyed said they intended to cut spending this year, more than the 58 per cent of Americans who answered the question the same way.

“People are basically tightening their belts as a way of being careful, but it's not a situation where they are not sleeping at night,” said Jeff Walker, senior vice president with Harris-Decima.

Many Canadians have yet to translate general pessimism about the economy into their own personal situation, likely because Canada has yet to experience a sustained period of job losses, Mr. Walker said.

Net employment is up in 2008, despite the one-month 71,000 job loss in November.

Anecdotal evidence suggests the economic uncertainty has also not completely deterred Canadians from shopping during the holiday season.

No firm Canadian data will be available before next week, when some U.S.-based retailers report results for their divisions in Canada, and Statistics Canada won't release its national tally of December sales until mid-February.

But debit-card operator Interac processed 15.9 million transactions on Dec. 23, its busiest shopping day of the year, up about two per cent from 15.6 million on the peak day of December 2007.

John Winter of retail consultancy John Winter Associates, said in an interview that amid “spectacular deals” in many stores, he projects “sales up a little bit, but margins much poorer than last year because of the discounting.”

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