Finance Minister Jim Flaherty is hinting that his fall economic update could delay the government’s target for erasing the federal deficit in light of slower economic growth.
After meeting Tuesday with private sector economists in Ottawa, Mr. Flaherty confirmed he’s now facing a “significant” downgrade in expected growth compared with the numbers that underpinned his 2011 budget.
Rather than 2.9 per cent growth this year in real domestic product, the latest figures suggest growth for 2011 will be 2.2 per cent. For 2012, expected growth has been reduced to 2.1 per cent from 2.8 per cent.
Mr. Flaherty will use these latest numbers – an average forecast from 15 private sector economists – to prepare an economic update that will outline what this means for Ottawa’s bottom line.
Slower growth means less revenue for the government, meaning it will have to decide whether to make up that loss with higher taxes, deeper spending cuts or by pushing out the deadline to erase the deficit.
Mr. Flaherty declined to say whether 2014-15 is still his target. “We will stay the course,” he said. “We will maintain the fiscal track so that we can achieve a balanced budget in the medium term. For the details, you’re going to have to wait for the fall economic update in the next few weeks.”
Ian Lee, a professor with Carleton University’s Sprott School of Business, said Mr. Flaherty seems to be softening his deficit target in the runup to the update.
“The only option that is viable for them politically and philosophically, given their position, is to push back [the target]by a year or something,” he said, noting that the government has ruled out higher taxes.
While growth is slower, Mr. Flaherty stressed that the Canadian economy is still in much better shape than most.
“Certainly it is a significant downgrading but it is relatively modest,” Mr. Flaherty said. “This is not doom and gloom. It’s continuing to be a forecast of modest growth in Canada.”
Peter DeVries, a former director of fiscal policy with the Finance Department who writes analysis for 3Dpolicy.ca, calculates that the latest private sector growth numbers could still produce a balanced budget by 2014-15. But Mr. DeVries said the government’s numbers should be assuming greater economic risk than in last year’s budget, which would then mean a forecasted deficit through to 2015-16.
The Conservative government had previously targeted 2015-16 as the fiscal year that the books would be balanced. Prime Minister Stephen Harper promised during the 2011 election campaign that his government could hit the target a year early, largely by reducing government spending.
The downgrade by private sector economists is similar in scale to the revised numbers out Tuesday from the Bank of Canada. The central bank cut its 2011 growth forecast to 2.1 per cent from 2.8 per cent and its 2012 forecast to 1.9 per cent from 2.6 per cent.
Craig Alexander, chief economist of Toronto-Dominion Bank, said the updated growth numbers will make it “more challenging” for Ottawa to balance the books by 2014-15. He argued that coming close is good enough when it comes to erasing the deficit.
“When we talk about rebalancing in the medium term, the medium term actually doesn’t have a specific year associated with it and the size of the deficit matters,” Mr. Alexander said. “So if you come close, but it’s remarkably small as a share of the economy, it really doesn’t matter.”