Bay Street economists were mostly positive in their responses to yesterday’s federal budget, praising the government’s tight fiscal policy, while expressing concern over new restrictions on pension plan’ ownership of income trusts.

“The overall thrust of the budget is cautious, although it does not mark a fundamental shift in fiscal policy,” said BMO Nesbitt Burns. “There were a number of long-term pledges made, but the costs were put well off into the future. Last year’s barrage of spending was more typical of a pre-election budget, but the sponsorship scandal has forced Ottawa to forego another spending spree and focus instead on careful fiscal management.”

“Ironically, from a broader economic policy standpoint, this may have been one of the few times when an expansionary budget was called for — just as Finance is preaching restraint. Bank of Canada Governor David Dodge has stressed in recent speeches that the economy will need to rely more on domestic spending to lead growth in the years ahead rather than exports, due to the dampening impact of the loonie’s surge over the past year,” Nesbitt said.

However, Bank of Montreal said that the government did the right thing. “While there are some analysts who argue that these circumstances call for expansionary fiscal measures, the Finance Minister has wisely chosen to let the Bank of Canada provide whatever stimulus may be required.”

National Bank Financial praised the restrained fiscal policy, too, saying that, rather than spending wildly, the government has allocated about $9.9 billion to rainy-day funds — the contingency reserve and the economic prudence provision. “The continuation of this tradition is welcome given the uncertain impact of currency appreciation on the economy and the need for restructuring of Canadian manufacturing. If past experience is a guide, the bulk of the reserves will go to debt repayment if unused,” it said.

In its response, CIBC World Markets Inc. noted that Canada’s economy has been riding the coattails of very expansionary U.S. fiscal policy, making Washington’s policies more important than Ottawa’s in many ways. That said, it suggested that whomever wins the U.S. election this year will have to rein in U.S. fiscal policy, which will drag on Canada, too.

Overall, Nesbitt says that the budget is modestly bullish for bonds. “By toning down new spending, eschewing tax cuts, and setting a target for debt/GDP, Canada will continue to boast the most solid fiscal finances in the G7. As well, the lack of major new measures, and impending restraint from some of the major provinces, will keep the onus on the Bank of Canada to support growth through continued low interest rates,” it said.

CIBC World Markets Inc. said that a continuation of the government’s strategy to lower the outstanding share of fixed-rate debt looks to produce another year of falling net bond issues. “A continued reduction in the fixed-rate share of outstanding debt remains a guiding theme for the coming year, however, triggering another increase in bills outstanding come year-end.”

For equities, Nesbitt noted the move to accelerate the depreciation allowance on tech equipment is a modest, if expected, positive. “However, the move to restrict pension fund holdings of income trust investments is a bigger issue for equity markets. The fact that individual investments in the sector have been left untouched, and could be left that way, should be a relief,” it says.

RBC Financial Group Economics said that faster depreciation has the potential to deliver important benefits. “It promotes business investment, eventually helping to lift productivity and Canadian competitiveness.”

The equity markets will also enjoy the flotation of the rest of Petro Canada. BMO noted, at current market prices, the government’s 49.4 million shares are worth about $2.85 billion, but are on the books for only $570 million. A sale would generate a gain of about $2.3 billion.

However, BMO is critical of the announced $270 million investment in venture capital. “Arguably, the problem for many start-ups and young firms is not inadequate access to capital, but rather a shortage of commercially viable ideas and projects,” it said.