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Finance Minister Jim Flaherty, left, and Prime Minister Stephen Harper walk to the House of Commons to deliver the budget on Parliament Hill in Ottawa on March 21, 2013. (BLAIR GABLE/REUTERS)
Finance Minister Jim Flaherty, left, and Prime Minister Stephen Harper walk to the House of Commons to deliver the budget on Parliament Hill in Ottawa on March 21, 2013. (BLAIR GABLE/REUTERS)

BUDGET 2013

Ottawa bets big on rebounding economy to slay deficit Add to ...

Stephen Harper’s vow to erase the nearly $26-billion federal deficit in just two years hinges on one big bet: that the economy will soon look a whole lot better than it does now.

Thursday’s budget makes no major new cuts as Ottawa holds the line on what it spends on such things as salaries and government programs.

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Instead, the Prime Minister’s plan to lop about $1-billion a month off the deficit and get to zero by 2015 hinges on some significant best guesses built on an average of private-sector forecasts. Ottawa is counting on factors largely beyond its control – most notably, that the economy will rev up after two years of stagnation – from just 1.6 per cent growth in 2013 to 2.5 per cent in 2014 and 2.6 per cent the year after.

The improved economy alone would bring in about $25-billion in fresh tax revenues from individuals and businesses over the next two years, according to projections in Finance Minister Jim Flaherty’s 430-page budget.

And determined not to raise taxes, Mr. Harper’s Conservative government is hitching the remainder of its deficit-cutting campaign to a batch of inherently unpredictable efforts, including closing tax loopholes, cracking down on tax cheats and raising import tariffs on goods from 72 countries, including China, India and Brazil.

Ottawa says those higher tariffs will bring in $333-million more per year, starting in 2015. But Canadian consumers will likely pay significantly more for some of the products they cherish, including big-screen TVs and iPads.

The budget also includes a major tightening of Canada’s tax code, which Ottawa estimates will bring in more than $4-billion in new revenue over six years by closing loopholes. One change in particular – a dividend tax credit change – will primarily affect small-business owners and raise more than $2-billion over five years.

Economists generally described Mr. Flaherty’s deficit goal as credible, but raised questions about some of the budget’s assumptions.

Former Finance official Don Drummond, now with Queen’s University, said that in his experience it isn’t a good idea to book savings based on the effect of going after tax cheats.

“If I was still at Finance, I probably would have objected to booking over a half-a-billion-dollars on tax compliance,” he said, noting that it takes time for programs to take effect.

“That was particularly a little bit suspect, because it takes a while to get those resources into place,” he said.

RBC assistant chief economist Paul Ferley noted the budget shows federal expenses will be lower than projected in the November fiscal update with little explanation for the change. For instance, expenses for 2014-15 are now expected to be $4-billion lower than projected just a few months ago. The only explanation in the budget is a sentence that says the change relates to lower projections for transfers to persons, other levels of government, direct program expenses and debt charges.

Mr. Ferley said that combination of assuming more tax collection and lower spending prompts some skepticism about the government’s promise to balance the books by 2015.

“There are some question marks,” he said. “In the main, it looks achievable, assuming we get reasonable growth in the economy.”

Economists note that the questions about the government’s numbers are offset somewhat by the fact that the Conservatives have estimated their revenues at $3-billion a year less than the private sector numbers would suggest, meaning they can take in a bit less money than projected and still hit their target.

Mr. Flaherty told reporters he is very confident with his pledge to erase the deficit by 2015. He said he could have included deeper cuts in the budget, but decided they weren’t necessary.

“We do not need to slash and burn, we can be sensible over time,” he said.

The Minister said his goal was to balance tight spending with measures that promote economic growth, such as support for manufacturing and municipal infrastructure.

“No one can predict the future with absolute accuracy of course,” he acknowledged.

“I’m actually very confident,” Mr. Flaherty added. “We could have done more. We could have had a figure that showed a bigger surplus than $800-million in 2015-2016. We chose not to because it’s not necessary to do so. We’re confident of the numbers.”

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