Canada's Harper signals permanent tax cuts in budget

By Frank McGurty

TORONTO (Reuters) - Canadian Prime Minister Stephen Harper signaled on Saturday for the first time that the budget his government will introduce next week will contain permanent tax cuts, not just short-term measures to lift the sagging economy.

"I think that if we're talking about tax cuts, these measures in most cases have to be permanent to be effective," the Conservative leader said in an interview with La Presse, the French-language daily.

Harper's minority government will introduce a budget on Tuesday for the coming fiscal year that will call for Canada's first deficit in a decade.

The package is expected to feature measures to stimulate Canada's flagging economy, including spending billions of dollars to build roads, bridges and other infrastructure, and modest tax cuts for consumers and businesses.

Canada has avoided deficits since 1996-97, and Harper has vowed that his government would never allow a return to permanent or "structural" fiscal shortfalls.

To that end, most of the stimulus measures in the package for the 12 months beginning April 1 are expected to be short term in nature, such as infrastructure projects, whose funding would end with their completion.

Harper, a longtime fiscal conservative and free-market champion, said on Saturday that the global economic crisis gave the government little choice.

"I think we're in a rare time where you need a deficit," Harper said in a separate interview with the Toronto Star newspaper, pointing to a sharp decline in consumer spending and business investment.

In the campaign before the October 14 federal election, Harper insisted Canada could avoid a deficit even as the global economy deteriorated. Most economists say Canada entered a recession in the fourth quarter of 2008.

DEFICIT SPENDING

"We're only moving into deficit because of the declining revenues of the slowing economy and ... our spending initiatives," the prime minister said in an interview with Global Television aired on Saturday.

"Those spending initiatives will run out eventually ... and our revenues will recover, so we should over four or five years, if we stay on track, return to a healthy surplus," he said.

The government envisions C$64 billion ($52 billion) in deficit spending over the next two fiscal years, an aide to Harper told reporters on Thursday, revealing a long-awaited number that has the potential to hurt the Conservatives.

The Liberals, the main opposition party in Parliament, have said they may vote against the budget and bring down the minority government if they consider the package inadequate.

Opposition parties have accepted the need for short-term deficits but have criticized the government for earlier tax cuts that they say led to narrower surpluses.

Public opinion appears to be divided over the issue of deficits. A slim majority of Canadians believe deficits of the size the government is planning are necessary to pull the economy out of recession, according to a Ipsos Reid poll released on Saturday.

But 41 percent of those surveyed said the spending was a waste of money.

Michael Ignatieff, the Liberal leader, said on Friday the government was irresponsible in leaking the size of the expected deficits. Ignatieff, who has said his party will wait until Wednesday before announcing how it will vote on the budget, accused Harper of playing political games at a time of crisis.

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