Jim Flaherty is poised to release a fiscal update Tuesday that will show the degree to which lower commodity prices and slower growth are making it harder for Ottawa to balance the books.
During a luncheon speech in Fredericton that is not expected to contain any new policy measures, the federal Finance Minister will update the government’s forecasts based on the latest estimates he has received from private-sector economists.
Those economists provided numbers last month that forecast slightly weaker-than-expected growth, particularly over the short term. Mr. Flaherty’s comments to date suggest he accepts that view.
While fall updates are sometimes used as mini-budgets, this one will be a traditional revision of federal revenue and spending projections in light of recent economic trends.
The minister said recently that Ottawa is “on track” to erase the federal deficit over the medium term, but he has also hinted that the precise 2015-16 target date for returning to balance may be pushed back.
Economist Pedro Antunes, who is in charge of forecasting for the Conference Board of Canada, said with recent signs of improvement in the global economy, there is no need for Ottawa to move away from its plan to scale back the growth rate of government spending.
“We’ve seen a little more stability around the situation in Europe, we’ve seen some glimmers of hope coming from the U.S. economy, so I don’t see really a need to change that plan,” he said.
The government’s March, 2012, federal budget forecast a deficit of $21.1-billion this fiscal year and said Ottawa would erase the deficit in 2015-16, posting a $3.4-billion surplus. In the months since, economic growth has been weaker than expected, leading to lower-than-expected government revenue.
That could affect Mr. Flaherty’s projected timeline for balancing the books.
“When you’re looking at a budget of $275-billion and you’re looking at a few billion dollars of deficit, you’re pretty close,” the minister told reporters earlier this month in Mexico City on the sidelines of a gathering of G20 finance ministers and central bankers. “I’m not obsessed with this year or that year. I am obsessed with balancing in the medium term.”
The government’s forecasts include a $3-billion-per-year cushion to account for economic risks. If those risks don’t materialize, then the cushion – officially called “adjustment for risk to revenues” – won’t be needed and the final numbers can end up being better than the forecasts.
Mr. Antunes said the cushion for this year will likely offset the lower-than-expected revenues.
The obvious big risk facing Canada at the moment is the debate in the United States over the so-called fiscal cliff, where Democrats and Republicans in Washington face a Jan. 1, 2013, deadline to come up with a new spending plan.
Peter DeVries, who used to prepare fiscal forecasts for Finance Canada, said Ottawa will most likely have to push back its target for balance.
“They should still be on track to have a balanced budget over the medium term,” he said. “Now whether that’s as per what they thought it was going to be back in March, or a year later or maybe even two years later, I think is pretty irrelevant.”
The reason why Mr. DeVries, as well as many private-sector economists, say they are not concerned about the precise timeline of a return to balance is because Canada’s debt as a percentage of gross domestic product is seen as manageable.
According to the International Monetary Fund, general government net debt (which includes the provinces and public pension assets) stood at 30.4 per cent in 2010. That figure is expected to peak at 37.1 per cent in 2016, before moving downward.
To put Canada in an international context, the comparable 2010 debt-to-GDP figures were 76.1 per cent for France, 71 per cent for Britain and 73.2 per cent for the United States.
Mr. Flaherty’s speech in Fredericton will mark the fourth time in a row that he has released the fall economic update outside of Ottawa. Parliament is not sitting this week because of Remembrance Day. Mr. Flaherty’s first update in 2006 was delivered to the House of Commons finance committee. His next two updates were via speeches on the floor of the House.