BMO Nesbitt Burns’ senior economist, David Watt, sees tax reform, not tax cuts, in the next federal budget, slated for March 23. He adds that new retirement savings vehicles could be in the offing.

In a research brief posted on the Nesbitt Web site, Watt says that although the Liberal government faces intense pressure to boost spending, particularly on health care, “little fiscal flexibility exists despite an expected budget surplus of around $7 billion for fiscal 2003/2004”. Apart from health care, areas that require attention include education, municipal finances, infrastructure, defence, and tax reform.

Despite the spending demands, Watt says that Finance Minister Ralph Goodale, “evidently plans to reintroduce the $1 billion prudence factor on top of a $3 billion contingency reserve, while also shifting $1 billion to higher priority initiatives. As well, Prime Minister Martin and Mr. Goodale have committed to lowering the debt ratio to 25% of GDP from just over 40% currently.”

He indicates that tax cuts are on the backburner in this budget, although some tax reforms are expected. Changes to the tax treatment of income trusts are unlikely, Watt says. “However, measures to boost Canadians’ retirement savings in the form of tax-prepaid savings plans (TPSPs), an idea floated in last year’s budget, might appear.” TPSPs would permit after-tax savings to be invested without the ongoing taxation of returns, and to be tax-free on withdrawal.

Tax reforms to make Canada competitive with other jurisdictions, and to boost productivity are anticipated, he notes. “Ottawa will reportedly allow accelerated depreciation allowances for business investment.”

Watt notes that education was highlighted in February’s Speech from the Throne, and he says that details are likely in the forthcoming budget. The government has committed to pass along $600 million in GST breaks to cities, and Watt says it also appears poised to inject funds into Toronto’s transit system. And, he notes that, with the demands for peacekeeping forces growing, calls for increased defence funding are becoming increasingly strident. He says that defence spending is now less than 1% of GDP versus 2% in the early 1970s.

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