This year’s federal budget was not obviously aimed directly at financial advisors and their clients. There’s nothing comparable to measures we have seen in recent budgets such as pension income splitting in March 2007 or the tax-free savings accounts announced last February. Nevertheless, there are aspects of the 2009 budget that we should be thinking about.

The Canadian economy is shrinking, though possibly not as much as in some other developed economies. So the budget’s major goals were to help people hurt by the recession, encourage borrowing and spending by Canadian consumers (within the bounds of normal prudence) and to add something to that mix in the form of direct spending by all levels of governments.

Getting credit going: encouraging lenders to lend

The budget’s aptly named Extraordinary Financing Framework is making available up to $200 billion in federal financing for credit markets to improve financing for consumers and businesses. Making credit available is one of the key measures to help kick-start Canada’s economy. While we have not experienced the swings in credit availability that have occurred in the United States, the minister of finance Jim Flaherty heard a number of concerns about the availability of credit in Canada when doing his pre-budget consultations.

Getting consumers to consume

One of the key goals of this budget is to leave more money in Canadians’ pockets and encourage consumer spending. The budget outlines a personal tax reduction, with more income taxed at lower rates, which will benefit all Canadians, and a temporary tax credit for home renovations that will encourage consumers to borrow and spend. An increase of the Home Buyer’s Plan to $25,000 and a new tax credit for first-time homebuyers are both intended to stimulate spending.

Getting businesses to invest and spend

The budget offers encouragement to businesses to invest through increased tax breaks on the purchase of machinery and equipment, including computers, as well as specific financial assistance to the agriculture, forestry, shipbuilding, automotive and space (robotics) industries. Accelerated reductions in corporate income tax rates are also intended to encourage businesses to invest.

So, what might all of this mean for advisors and their clients? I take back what I said earlier. There are a few items of interest.

The federal government indicated that it will work with willing partners to establish a Canadian securities regulator that respects constitutional jurisdictions and regional interests and expertise. Of course this isn’t new — discussion about moving to a single national regulator has been going on for longer than I care to remember. What is new is the finance minister’s stepped-up determination to move this initiative forward.

Another item in the budget might be the “sleeper” gem for advisors: the commitment to work with provincial governments to promote financial literacy. The other governments come into the equation because education is a provincial responsibility. There is no guarantee that this particular initiative will amount to anything — this matter has been talked around for years. But if it does, it could not only make for a nation of well-informed investors, but it could also provide many more opportunities for advisors to take their clients’ financial education well beyond the primary stage; many advisors are confined to a basic level, because of their clients’ almost total lack of investment knowledge when they first appear on the advisor’s doorstep.

Most of the budget’s effect on investors is indirect. To the extent that the budget does achieve its stated goal of getting the Canadian economy back on track, there is the possibility of increased sales and better earnings for some Canadian companies. More specifically, the new tax credit for home renovations and the proposed infrastructure spending may prove beneficial to some individual companies. Finally, some additional government oversight of Canadian financial institutions (which are arguably in much better shape than many of their international counterparts) may at a minimum improve the perception of Canadian financial institutions in the eyes of international investors.

In the end, the budget doesn’t change the biggest challenge facing financial advisors: continuing to encourage investors to stick to their long-term investment plans.

Peter Drake is vice-president, retirement and economic research, for Fidelity Investments Canada. With over 35 years of experience as an economist, he leads Fidelity’s research efforts in examining retirement n Canada today.

(02/03/09)