Auto bailout could add about $7 billion to Canadian total

The escalating cost of the auto sector bailout is adding about $7 billion more to the federal deficit than previously booked in the January budget, federal officials said Thursday.

OTTAWA — The escalating cost of the auto sector bailout is adding about $7 billion more to the federal deficit than previously booked in the January budget, federal officials said Thursday.

The total cost to Ottawa for bailing out GM Canada and Chrysler are tallied will be in the $10 billion range, of which $2.7 billion has already been accounted for in the January budget, they said.

If Ontario’s one-third share is included, the Canadian portion of the rescue package for the two Detroit-based automakers approaches $15 billion.

But Finance Minister Jim Flaherty said the investment was a good deal for Canadians.

“It is saving an industry and it’s saving thousands of jobs in a recession,” he said in a television interview.

The estimates — final figures are unavailable because negotiations are still ongoing in the case of General Motors Corp. (NYSE:GM) and Chrysler remains under bankruptcy protection — help shed light into Flaherty’s shocking disclosure that Ottawa’s deficit will balloon to over $50 billion, up from the January estimate of $34 billion.

At the time, Flaherty said the auto bailout represented a major portion of the increase.

In a clarification to The Canadian Press on Thursday, the press secretary for Industry Minister Tony Clement said the government was being extra careful and booking the entire estimated costs in the deficit calculation.

“As part of the Chrysler deal is a straight-forward repayable loan, and the another part converts funds into equity in the company, each of those parts will count differently on the government’s books, so the true fiscal impact to the government is not fully determined as yet,” said Pema Lhalungpa.

“Until the deal is complete, the government estimates the fiscal impact at its most conservative number or, simply put, dollar-for-dollar.”

She added that although the government does not yet know the final tally on the General Motors rescue, “to be safe the government is calculating numbers very prudently in order to be as truthful as possible with Canadian taxpayers.”

A second official confirmed on background that the total cost to Ottawa will be about $10 billion.

According to the New York Times, GM has confirmed that the U.S. government will ante up US$50 billion for the Detroit-based automaker, making Canada’s contribution between $8.25 billion and $11.1 billion, depending on the calculation of production share in Canada.

As well, the federal and Ontario governments have committed to contributing $3.37 billion to Chrysler, with Ottawa picking up two-thirds, or $2.26 billion, of the tab.

As with the Chrysler package, Canadian taxpayers will be acquiring an equity stake in GM as well as providing billions in repayable loans.

Ontario Finance Minister Dwight Duncan said it was too early to say what percentage of the new GM will be owned by the two governments.

But he said he expects a restructured GM will prosper in Canada, although “it may not be as large” as current operations.

“I am optimistic that we will continue to have a viable presence of GM in Oshawa, in St. Catharines, in Ingersoll and that we will protect the footprint of the industry in Ontario,” he told reporters in Toronto.

With a May 31 deadline for presenting Washington and Canadian governments a restructuring plan, GM took a giant step toward the goal Thursday by announcing it had reached a deal with bond holders who own US$27 billion of the company’s debt.

The automaker said debt holders have accepted a proposal that would give them up to 25 per cent of the company.

Booking the entire estimated cost of the bailout has had the effect of ballooning the federal deficit beyond what even the most pessimistic private sector economists had projected, but Canadian Auto Workers president Ken Lewenza said the deficit will be higher if the automakers fail.

“I would suggest that if we didn’t get the auto loans to keep General Motors afloat, the federal government would lose about $14 billion a year in annual taxes and the provincial government would lose $5 billion in annual taxes,” he explained.

Yet CAW economist Jim Stanford said the government didn’t have to book the loans in the deficit projection.

“It’s a loan, not a bailout,” he said. “A loan is very different from a direct expenditure and it’s coming from the EDC (Export Development Canada) not the government.”

“You could make a loan-loss provision as a bank does on what will be repaid and what won’t, but you certainly wouldn’t make a 100 per cent loan-loss provision.”

Liberal finance critic John McCallum, a former federal revenue minister, also questioned why Flaherty was booking the entire cost of the rescue package in one year and as a shortfall.

McCallum said one explanation is that the government doesn’t believe it will be repaid for the loans, but added there could be a political motivation as well.

“Maybe they want the deficit now to sound high so that they’ll deter us from our employment insurance proposal (to extend benefits to the jobless),” McCallum said.

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