Harper government must stop hiding behind surplus illusion

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The Parliamentary Budget Officer is saying what the Harper government won't, or can't: Emperor Surplus has no clothes.

In a report Wednesday updating the government's 2015-16 budget, the PBO calculated that because of Canada's disappointing economy, the budget is on track not for its targeted $1.4-billion surplus this fiscal year, but rather a $1-billion deficit. That's based on the Bank of Canada's latest economic outlook, issued last week, in which the central bank slashed its 2015 gross domestic product growth forecast to 1.1 per cent – barely half of the 2-per-cent forecast on which the spring budget was based.

Keep in mind that the PBO isn't questioning the veracity of the economic assumptions that the government built into its budget. It has merely taken those assumptions (most important, the GDP forecast), and the budget's stated "sensitivities" to changes in those assumptions (i.e. to what degree any change would affect budgeted revenue and expenses), and recalculated the bottom line. The result was that if the economic conditions play out the way the Bank of Canada has projected, the reduction in government revenue will eat through both the projected surplus and the budget's $1-billion contingency fund – with room to spare.

The question over whether Ottawa faces a small surplus or a small deficit is a political one, not an economic one. There's an election in the fall, after all. Balancing the books was a key promise of the Harper Conservatives in the past election campaign, and they are adamant about going to the polls having delivered on that pledge. The opposition parties, on the other hand, will hold up any failure by the government in this regard as evidence of economic mismanagement.

But at $1-billion, a deficit could represent a tiny 0.3 per cent of the annual budget. Even with the reduced economic projections, the PBO still anticipates the federal government to return to a small ($600-million) surplus in 2016-17, just a year later than the current government had planned. Economically, these numbers are small enough to fall under the category of hair-splitting.

But there is an economic issue in how the Conservatives choose to address the surplus that appears to be slipping from their grasp.

So far, it's stuck in the denial stage. The day before the PBO report, Finance Minister Joe Oliver stressed, repeatedly, that he still expects a budget surplus this year. The Prime Minister's Office said the same thing in a statement issued Wednesday in response to the PBO report.

And here's what Mr. Oliver had to say about the economy, which most economists (including those at the Bank of Canada) believe actually contracted in the first half of the year.

"This feels like a period of slower growth, but not a period of contraction. After all … we've created almost 100,000 jobs [in the second quarter], and consumer confidence is pretty good," he told reporters in Toronto Tuesday, stressing that the consensus among economists (again including those at the Bank of Canada) is that "we're going to see growth in the second half of the year."

"We have the [GDP] numbers for the first quarter, and one month for the second quarter. We await the results as they come in, and then we'll know what, in fact, they are. But it's the consensus that the economy will experience positive solid growth for the entire year."

Yes, "positive" – but pretty much no one still expects growth in the ballpark of the 2 per cent that the budget had projected. Indeed, the "consensus" among economists at Canada's six big banks is more like 1.3 per cent. Either Mr. Oliver is stalling for time, praying for a second-half miracle, or, likely, a bit of both. After all, he can keep talking about a second-half turnaround right through the October election – and there won't be sufficient economic data out there to prove him wrong.

The same goes for the budget. On Wednesday, the Finance Department's fiscal monitor reported a $3.9-billion budgetary surplus in April and May, the first two months of the 2015-16 fiscal year. The numbers were juiced by the $2.1-billion in proceeds from the government's sale of its remaining General Motors shares in April – which will help keep the budget figures looking good well into the fiscal year, even if the economy isn't delivering.

It's all a bit of an illusion, if not a delusion. But given the Harper government's zeal for a balanced budget this year, this might be better than the obvious alternative for Mr. Oliver: cutting spending in order to achieve the surplus he is still promising. A bout of belt-tightening by the government would pull more spending out of an economy that is already hurting. It's the opposite of what sound fiscal policy should do for an economy; the government should lean against a slowdown, not add to it.

So then maybe none of us, including Mr. Oliver, should fret over the PBO's report. A small deficit, in this economic environment, is more appropriate than many of the alternatives. But while we're at it, let's deal with the reality and make sure we're on top of the appropriate economic policies to deal with it. Let's get past the election-mentality denial.