If dreams come true…

Zoomer | March 25th, 2010

There are large dollops of optimism and hope in the federal budget that was brought down last month. Some critics have even suggested that Finance Minister Jim Flaherty’s economic and fiscal projections amount to wishful thinking or perhaps even dreaming.

But let’s suppose for a moment that his forecasts and those of the private sector, which were extensively quoted in the budget plan, actually come to pass. If that were to happen, Canada would become one of the most attractive places in the world for investors. In fact, foreign money would pour in so fast that holding the loonie to anywhere near par would become a major challenge for the Bank of Canada.

Think about it. If the Finance Minister and private sector analysts are anywhere near the mark in their predictions, Canada will be back to a balanced budget in five years. We will have the lowest net debt to GDP ratio, by far, among the G7 industrialized nations. Taxes will remain stable while the ratio of program spending to GDP will decline. Unemployment will drop from 7.9 per cent in 2011 to 6.6 per cent in 2014. Inflation will remain close to the Bank of Canada’s 2 per cent target. Our currency will be strong. Our banking system will continue to be a model for the world. We’ll have a national securities regulator. Canada will be the first G20 country to offer a tariff-free zone for manufacturers. We’ll have the lowest corporate tax rate in the G7. What’s not to like?

Of course, for all this to take place everything would have to unfold without a hitch. A few small hiccups and it would be back to the drawing board. For example, the budget estimates that a one-year decrease of one percentage point in the GDP forecasts would have a negative impact of $3.1 billion on the budget projections in the first year, increasing to $4.4 billion in year five. A sustained one percentage point increase in projected interest rates would add $1 billion to the deficit in the first year and $3 billion by the fifth year.

“Even if the economic outlook were known with certainty, there would still be risks associated with the fiscal projections because of the uncertainty in the translation of economic developments into spending and tax revenues,” the budget plan states.

The budget doesn’t even address the possibility of a double-dip recession that would obviously throw all the carefully prepared forecasts out the window. Mr. Flaherty admitted during his budget press conference that there are many potential economic threats lurking but he and his fellow cabinet ministers are apparently operating on the assumption that none of them will materialize. Murphy’s Law suggests they’re wrong.

So let’s not pop the Champagne corks just yet. There are still a lot of potential trouble spots along the way. That said, the historical numbers show that we are in a better position than the other countries of the G7, including the United States. The Conservatives can’t take credit for the decade of federal surpluses that left us on such a strong footing (Paul Martin and Jean Chretien get the kudos for that) but if they can deliver on their agenda going forward, they may finally gain the prize they have been seeking for so long: a majority government.

But that’s politics. What investors care about most is the outlook for our markets. If this budget turns out to be anywhere near accurate in terms of its forecasts, Canada will be a pretty good place for your money in the coming years.

This article originally appeared in the Internet Wealth Builder, a weekly e-mail newsletter that provides timely financial advice from some of Canada’s top money experts. Try it for three months (12 issues) for only $37.50 plus tax.

Gordon Pape’s latest book is The Ultimate TFSA Guide: Strategies for Building a Tax-Free Fortune, published by Penguin Group Canada. It can be ordered at 28 per cent off the suggested retail price at http://astore.amazon.ca/buildicaquizm-20