Flaherty hints at tax cuts in upcoming budget

Tax cuts could be included in the upcoming federal budget as one way of stimulating the economy in the face of a global financial crisis, Finance Minister Jim Flaherty said Friday.

While previously announced corporate tax cuts and new tax-free saving accounts should help enliven the sagging economy, Flaherty said the government is considering other measures.

"There are a couple of ways to stimulate the economy. One is spending on the infrastructure side and other ways, and tax reductions — leaving more money in people's pockets — is also stimulus to the economy," Flaherty said in Ottawa at the official launch of the Tax-Free Savings Accounts, which came into effect Jan. 1.

"We've been reviewing other [tax] options," he added.

The new accounts, introduced in the last budget, will allow anyone over the age of 18 to save up to $5,000 annually, tax-free. The accounts are designed to encourage Canadians to increase their savings.

Many economists doubt cutting taxes is the best way to stimulate the economy as there is no guarantee the money Canadians save will be spent in a way that promotes economic growth.

Consumers could instead use the tax saving to pay down debt — which is what happened when the U.S. government provided a big tax rebate in 2008 — or use it to buy imported products, which means the money leaves the country.

In contrast, if the government spends more on infrastructure projects such as new bridges or roads, it puts money more directly into the community because most of the materials will be purchased from Canadian companies and the wages will be paid to Canadian workers.

Flaherty has already said infrastructure spending will be a cornerstone of the government's plan to fend off further economic decline as Canada teeters on the verge of a recession. The federal budget is slated for presentation on Jan. 27.

The finance minister's comments came as new research indicates the majority of Canadians have serious doubts about the future of the economy.

A new survey from Harris Decima released Friday found 64 per cent of Canadians are feeling pessimistic about the economic outlook for 2009 — twice as high as the number of individuals who felt that way in a survey conducted last August.

The poll results suggest Canadian consumer confidence is down to similar levels as in the United States, where the economy has taken an even larger beating and consumer confidence fell to a record low in December.

Flaherty has said there are three factors affecting Canada's economy: falling world GDP; a continuing U.S. recession; and a drop in commodities prices.

He acknowledged Friday the situation is a cause for concern.

"I've been worried for some time with what is happening in the economy globally. We are in a time where the world has entered a global recession," Flaherty said.

"We will take the steps necessary so that Canada will not only endure the global recession and its effects on Canada, but also we will exit the global recession stronger and in a position to grow as the economy recovers."

The study surveyed about 2,000 people between Dec. 11 and 21, 2008 and has a margin of error of 2.2 per cent 19 times out of 20.

With files from the Canadian Press