Canada’s federal budget for 2009 should include $26 billion in spending initiatives over four years to promote economic recovery, the C.D. Howe Institute says.

In a new report, the institute finds that the government could spend this amount while still keeping the country on track towards its long-term goals.

“Canada’s 2009 federal budget should serve the complementary aims of promoting recovery while keeping the country visibly on course toward its longer-term fiscal and economic goals,” the report says.

Since Canada’s aging population is set to substantially push up the costs of health, education, seniors and family programs, the C.D. Howe Institute recommends stimulus measures that still leave the government financially prepared for the pressures to come.

The institute is calling for federal stimulus on various fronts.

In the infrastructure realm, the C.D. Howe Institute calls the currently budgeted investments “limited.” It urges the government to pursue projects with faster implementation times, such as repairs and maintenance of assets controlled directly by the federal government.

The report urges measures related to employment insurance that immediately ease benefit access in the worst served areas. It suggests making the duration of, and access to, benefits equal wherever the unemployment rate is less than 10%. Coming at a cost of $240 million in 2009, this move would provide laid-off workers in low unemployment areas with benefits matching those in higher unemployment areas, the institute says.

The budget should also include an extension of the period during which seniors can contribute to their pension plans, according to the report. The institute suggests changing the age at which contributions to plans must cease to 73 from 71, which would delay the forced RRIF withdrawals that “threaten retirees’ financial security.”

Also on the topic of RRIFs, the institute urges the government to consider longer-term modifications to required withdrawals. It suggests requirements similar to those in the United States, which are roughly half of the Canadian withdrawal levels.

“While these measures will not add to demand in the short term, they will marginally reduce forced liquidations of financial assets by retirees, and associated financial-market stresses,” says the report. “The likely cost of this measure is small.”

To support capital investment by Canadian businesses during the economic downturn, the C.D. Howe Institute suggests a temporary extension of the current Atlantic investment tax credit nationwide, which could be withdrawn once the economy has recovered. This credit applies to new spending on buildings, machinery and equipment in the Atlantic region, and would encourage businesses to spend now rather than later.

To aid production in Canada, the report calls for the elimination of tariffs on imports of intermediate inputs and capital goods, which would direct $1.4 billion to businesses that are producing and investing.

Also lowering the cost of business investment would be a replacement of provincial retail sales taxes in the five provinces that maintain them with value-added taxes akin to the Goods and Services Tax, according to the C.D. Howe institute.

Further tax measures could include accelerating reductions in the general corporate income tax rate, which are now scheduled to reach 15% by 2012, by one percentage point.

In addition, extending the dividend tax credit to include dividends paid into retirement savings plans would alleviate some need for new saving by individuals and plan sponsors in the short run, and remove a distortion in Canada’s tax system in the long run, according to the report.

To boost the spending power of low-income households in the short-run, the institute recommends increasing the working income tax benefit by $250 for singles and $500 for families, as well as boosting the universal childcare benefit by 10%.

More spending support could come through personal income tax relief. “Lowering PIT rates one percentage point would reduce revenue by about $5.7 billion annually,” the report says.

Although the C.D. Howe Institute admits that not all of its proposed measures are affordable, it notes that most could be phased in or out without fuelling an intolerable deficit.

“Canada entered the financial crisis in enviable shape,” the report says. “Its strong fiscal track record creates scope to cushion the downturn without undermining household and businesses confidence in its longer-term prospects.”

IE