Ottawa remains confident that it can balance its books in the next five years without raising taxes, despite assertions by Canada's budget watchdog that the federal government will face a $19-billion structural deficit by 2013-14.
Speaking to reporters Friday after a speech in Toronto, Finance Minister Jim Flaherty said fears that Canada won't be able to eliminate its deficit are speculative and not based on the facts.
"I see speculation. I don't see a lot of evidence. I see editorial comment without numbers, without analysis," Mr. Flaherty said.
For months, the Finance Minister has said that a combination of higher revenue from an improving economy and smaller increases to program spending will allow the federal government to balance its books by the 2015-16 fiscal year.
"I'm comfortable with the fact that if we have reasonable economic growth and we, if necessary, restrain the rate of growth of government program spending, then we can get to a balanced budget in the medium term," he reiterated Friday.
Parliamentary budget officer Kevin Page said this week that the current recession-driven deficit will become a chronic shortfall of $18.9-billion within four years if the government simply hopes for economic growth.
Years of tax cuts - most significantly the cut to the GST, but also to corporate taxes - has left Ottawa unable to withstand downturns without falling into deficit, especially as the population ages, Mr. Page said.
But Mr. Flaherty said tax reductions help to stimulate the economy and that without them the downturn would have been worse.
"Tax reductions are a stimulus. The more money we leave in the hands of Canadian individuals and families, the more they have available to spend and help the economy expand and create jobs," he said.
The large discrepancy between Mr. Page's and Mr. Flaherty's forecasts can be attributed to the fact that predicting the deficit five years out is akin to "dancing on the head of a pin," said Avery Shenfeld, chief economist at CIBC World Markets.
"A very small error in your assumption on annual growth in revenues and annual growth in expenditures will add up to a cumulative huge difference when you compound it over five years," Mr. Shenfeld said.
The Finance Minister said Friday that most Canadians want the government to stabilize the economy before it worries about eliminating the deficit, and emphasized that at 31 per cent, Canada has the lowest debt-to-GDP ratio of any of the Group of Seven countries. This compares to 67 per cent in the United States, 75 per cent in Britain and 115 per cent in Japan.
Canada's relatively healthy fiscal position means that even the structural deficit predicted by Mr. Page is small enough that Canada's debt-to-GDP ratio will continue to shrink over time, Mr. Shenfeld said.
"Our debt levels are low relative to other countries, which gives us the luxury during weak economic times of not panicking about a few years of deficits," he said.
The government will deliver its budget for the 2010-11 fiscal year on March 4. The deficit for the current fiscal year is expected to be "well in excess of $50-billion," but Mr. Flaherty said that will be cut nearly in half when stimulus spending ceases in 2011-12.
"We will have a budget, as we move forward in the medium term, of about $300-billion more or less, federally, and we will have a deficit that will be somewhere between $20-billion and $30-billion, probably. Can we deal with that? Yes, we can deal with that," he said.
The parliamentary budget officer said Wednesday that a deficit of one per cent of GDP is "not a big problem," but added that the government needs to prepare for future risks, and the fact that a new, smaller economy is emerging from the recession.
Canada's population is aging, Mr. Page said, and more and more Canadians are moving from being producers who pay taxes to being retirees who drain government services.
As a result, he said, the economy's growth potential will fall from the current two per cent to 1.7 per cent in 2014, which means less tax revenue.
According to the budget office, labour's input to potential growth in Canada will slide from 1.4 per cent in 2008 to 0.5 per cent in 2014, and will continue to fall after that.