Ottawa to post bigger-than-expected surplus in 2015, Flaherty says

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Tighter spending by federal departments will allow the Conservative government to post a bigger-than-expected surplus in 2015-16, said Finance Minister Jim Flaherty.

Speaking at Finance Canada headquarters following a meeting with private sector economists, Mr. Flaherty said economic growth is largely on track with the expectations in his March budget.

"I can tell you that the plan is to budget a surplus in 2015, and not a tiny surplus," said Mr. Flaherty. "There'll be no doubt that we're balanced in 2015."

Mr. Flaherty's March budget projected that Ottawa will climb out of deficit in 2015-16 with a surplus of $800-million, but that was before last week's news that the 2012-13 deficit came in nearly $7-billion lower than projected in the budget. The government's latest estimate for the size of the 2015-16 surplus won't be known until the release of Mr. Flaherty's fall economic update, which is expected in early November.

The government made several tax cut promises in the 2011 election campaign that were contingent on a balanced budget, including doubling the Children's Fitness Tax Credit, launching an Adult Fitness Tax Credit and allowing income-splitting for families with children under 18. Mr. Flaherty will need to show Ottawa's finances can absorb the hit on revenue that would come from new tax cuts.

Earlier Monday, the Parliamentary Budget Office released a report that projects a $200-million surplus in 2015-16.

Mr. Flaherty noted that the PBO report did not take into account the government's recent pledge to freeze the overall federal operating budget. He also said his officials would be contacting the PBO to explain how departments will likely continue to spend less than their approved budgets.

"This isn't just a one year phenomenon although it's grown. And we're talking very substantial sums of money, so it makes a difference," said Mr. Flaherty.

In its report, the PBO said there is a better than 50 per cent chance that the Conservative government will balance the books as promised by 2015.

The PBO estimates that the federal deficit will shrink from $18.9-billion in 2012-13, to $14.7-billion in the current fiscal year and then $5.6-billion in 2014-15 before posting a small surplus of $200-million in 2015-16.

The PBO has revised up its forecast for real Gross Domestic Product growth, but revised down its forecasts for GDP inflation. As a result, its forecasts for nominal GDP growth – which combines real growth and inflation and is a more useful predictor of government revenues – has come down.

Comparing its April forecast to its October projection, the PBO expects nominal GDP to be 2.9 per cent in 2013 (down from 3.2 per cent), 3.4 per cent in 2014 (down from 3.7 per cent) and 4.2 per cent in 2015 (down from 4.7 per cent.)

The PBO report also notes that the ratio of regular Employment Insurance beneficiaries to unemployed persons has been declining over the past three years.

"If the [ratio] continues to remain low, or declines further, expenses will be reduced and the budgetary balance will be improved over the short term," the report states.

The report does not comment as to why the ratio is on the decline. The government has made several changes to EI rules in recent years and critics say it has made the program harder to access for unemployed Canadians.

Mr. Flaherty announced in September that he would be freezing EI premiums at current rates rather than implementing previously-planned increases. The government says it will set premium rates so that premium revenues and program expenses balance over a seven year period.

Last week the federal government announced that the 2012-13 deficit came in at $18.9-billion, which was nearly $7-billion smaller than the $25.9-billion it had estimated in the March budget. Mr. Flaherty's November update will be the first time he will say how that lower deficit will carry forward into the government's deficit and surplus projections for the years ahead.