RBC Economics says that finance minister Jim Flaherty’s economic and fiscal update is unlikely to have much impact on monetary policy in the short-term.

“The actual fiscal stimulus contained in today’s Update is relatively limited and the proposals for consideration for the spring budget pose only a limited upside risk to the outlook for consumer spending and business investment in the second half of 2007,” it says.

“The Bank of Canada assumes that after a period of below-potential growth, Canada’s economy will reaccelerate mid-2007. Today’s report will have little impact on the near-term outlook for monetary policy with the overnight rate expected to hold at 4.25%,” RBC adds.

The federal government revised up forecasted surpluses and pushed forward the goal that Canada’s debt-to-GDP will fall to 25% to 2012-2013 from 2013-14 in the May Budget, it noted. “Higher-than-expected tax revenues in the first six months of fiscal year 2006-07 produced an upward revision to the government’s underlying surpluses for 2006-07 and 2007-08 to $7.2 billion in 2006-07 and $7.3 billion in 2007-08 from $3.6 billion and $4.4 billion in the May Budget,” RBC reports.

“The initiatives announced prior to today’s Statement including the increase in the age credit, pension income splitting and the employment insurance premium rate reduction are estimated to trim the planning surplus by $695 million in fiscal 2006,” RBC says. “The government also announced that interest savings from federal debt reduction will become personal income tax reductions totaling $800 million in 2007-08 and rising to $1.4 billion per year by 2011-12. Other measures including the reduction in the general corporate tax rate, changes to the legislation on income trusts and another 1% reduction in the GST will take effect in fiscal 2010-11. Over the five-year planning horizon, the measures total $22.2 billion.”