A year ago, the financial services sector was the apple of Finance Minister Jim Flaherty’s eye, as he announced his intention to build a competitive advantage in capital markets. A year later, little of that vision has been achieved and, in the 2008-09 budget, his ambition has been scaled down.

Last year, Flaherty’s aspirations for the capital markets merited their own budget paper. This year, they have essentially been reduced to one paragraph.

There are no visionary plans for the sector in this year’s budget. Instead, the government mainly rehashes its efforts toward the goals outlined in the 2007-08 budget. “Progress has been made in all areas of the plan,” it insists. But, it notes, many of the reforms it had hoped to achieve require the cooperation of the provinces.

That cooperation has not been forthcoming in critical areas, such as the reform of securities regulation, which are supposed to make the Canadian industry more efficient and more competitive. Moreover, some of the developments it sought — such as free trade in securities — were always beyond the scope of its ability to act unilaterally. And so, they, too, remain incomplete.

But even the initiatives that the government was in a position to take on by itself, such as a new disclosure regime for principal-protected notes, remain works in progress. Others, such as the improvement of the RCMP’s integrated market enforcement teams, will take time to bear fruit.

For the year ahead, the budget reports that the government is continuing to work toward a common securities regulator with the recent appointment of the so-called “expert panel” — headed by Tom Hockin, former federal minister and chairman of the Investment Funds Institute of Canada — to advise it on ways to improve the content and structure of regulation.

But the budget documents indicate the government has already decided how to achieve those objectives. “The government is committed to working with provinces and territories to move toward a common securities regulator that will deliver proportionate, more principles-based regulation and strong enforcement,” the budget adds.

However, the optimistic rhetoric that characterized last year’s plan is gone. Instead, Ottawa says it will continue to pursue those original objectives “in focused areas.”

It appears that the government has been chastened, if not by provincial intransigence and the difficulty of achieving progress on tricky issues such as international trade, but by the effects of the credit market disruption. In addition to the expert panel, the only other measure it proposes that would directly target the financial services sector is one to modernize the Bank of Canada’s statutory authority and update its treasury risk guidelines to ensure effective risk management.

Apart from the plan to introduce a new savings vehicle and tweaks to some of the existing savings plans, which should presumably generate increased demand for financial services, there is very little in today’s budget for those who are hoping for a continued federal effort at creating a competitive advantage in capital markets.