In an effort to cope with an economic downturn and widespread market volatility, the federal government proposed on Thursday cuts in spending, greater authority to provide support to financial institutions, solvency funding relief to pension plans and a reduction to minimum withdrawal requirements for RRIF holders.

In presenting the Economic and Fiscal Statement, Finance Minister Jim Flaherty announced the new steps to “protect Canada’s fiscal position and the ongoing stability of the financial system in Canada.”

The statement includes a proposal to give the finance minister more authority to support the financial system in “extraordinary circumstances.” Specifically, the minister would get authority to grant funding in the unlikely event of a draw on the Canadian Lenders Assurance Facility; to direct CDIC to undertake key resolution measures to ensure financial stability when necessary; and to inject capital into a federally regulated financial institution to support financial stability, on terms that would protect taxpayers.

In addition, the proposals would grant the CDIC the power to establish a bridge bank to help preserve critical banking functions, and would boost the borrowing limit of CDIC to $15 billion to reflect the growth of insured deposits, in the first increase since 1992.

“This is consistent with the additional powers we provided the Bank of Canada earlier this year,” Flaherty said in his speech. “It is also in keeping with the action plans we agreed to with our international counterparts at the G7 and G20 meetings.”

To help seniors cope with the eroded value of investments, Flaherty proposed a one-time change to allow RRIF holders to reduce their required minimum withdrawal by 25% for this tax year.

“Many seniors are understandably concerned about the impact of the sharp decline in the markets on their retirement savings,” Flaherty said.

As an example of the proposed change, he said an individual otherwise required to withdraw $10,000 from their RRIF in 2008 would instead be reduced to withdraw $7,500.

If the individual has already withdrawn more than $7,500, they will be permitted to recontribute the excess up to $2,500, and claim an offsetting deduction for the 2008 taxation year.

On the topic of pension plans, the economic statement proposes doubling the length of time required for solvency payments for plans under federal jurisdiction from five years to 10 years.

Companies seeking the extension would have to meet one of two conditions: the agreement of pension plan members and retirees by the end of 2009; or the securing of a letter of credit to cover the 5-year difference to protect pensioners.

“Based on what has happened so far, and under current rules, the decline in value of these plan assets would trigger substantial payments at the worst possible time for struggling companies,” Flaherty said. “Today’s announcement will give these companies one more option they can use to cope with these extraordinary circumstances.”

Flaherty also noted that the government plans to make more permanent changes to pension legislation next year. It plans to soon launch consultations on issues facing defined benefit and defined contribution pension plans.

The statement also included help for exporters, in the form of equity injections to boost the supply of credit available to export-oriented manufacturers. A $350-million injection in Export Development Canada will support of up $1.5 billion in increased credit for exporters, including the auto sector, Flaherty said.

“The export sector has been hit hard by the financial crisis. EDC will now be able to add to the nearly $80 billion in exports and investment it helps make possible for Canadian enterprises, including $4 billion for the auto sector alone,” he said.

In addition, small and medium-sized businesses were handed a lifeline in the form of a $350-million injection into the Business Development Bank of Canada, which will boost its lending ability by roughly $1.5 billion.

The statement also includes cuts to government spending, including the elimination of quarterly subsidies to political parties, effective April 1, 2009.

“In keeping with the focus on spending management, the quarterly subsidy that benefits political parties is no longer justifiable,” Flaherty said.

In addition, new legislation will control growth in public sector wages. Public sector workers, including MPs, senators, cabinet ministers and senior public servants, will receive wage increases of 2.3% for 2007-08, and 1.5% for the following three years.

The government is undertaking strategic reviews of department spending, and all departments are being instructed to manage costs carefully, limiting spending in areas such as hospitality, travel, conferences and professional services, Flaherty said. The strategic review will also include an examination of all the government’s corporate assets.

@page_break@“Corporate assets will be assessed systematically to make sure that the initial rationale for government ownership is still relevant, that their activities are still effective, and that their business plans are sustainable,” Flaherty said. “An asset purchased in the 1950s may no longer be relevant to the core responsibilities of the Government more than 50 years later.”

The statement also included a pledge to act quickly on the securities regulation front.

“Our cumbersome and unwieldy system of 13 securities regulators is a glaring flaw in Canada’s world-leading approach to promoting financial stability,” Flaherty said.

The government’s fiscal projections have changed considerably since the February budget, thanks to weaker economic projections that will reduce revenues. The Department of Finance now expects an underlying surplus of $0.8 billion in 2008–09, down from February’s estimation of $2.3 billion, and $0.1 billion in 2009–10, down from $1.3 billion in February.

Lack of stimulus measures criticized

Various industry groups blasted the economic statement for its lack of economic stimulus measures.

The Canadian Centre for Policy Alternatives criticized the economic statement as “wildly out of step” with the actions of other governments around the world.

“This economic statement will deepen and lengthen Canada’s recession instead of cushioning the blow,” said CCPA senior economist Armine Yalnizyan. “Slashing and burning federal spending and the government’s indecision on an economic stimulus package will actually contribute to a downward economic spiral.”

The United Steelworkers union also slammed the statement for failing to stimulate the economy.

“The federal government should be willing to temporarily run a deficit in order to stimulate Canada’s faltering economy,” said USW economist Erin Weir. “Cutbacks in the midst of an economic downturn will do further damage.”

IE