BUDGET

Provinces’ grim outlook clouds Flaherty’s fiscal forecast

OTTAWA — The Globe and Mail

Minister of Finance Jim Flaherty responds to a question during question period in the House of Commons, Tuesday, Jan. 29, 2013 in Ottawa. (Adrian Wyld/THE CANADIAN PRESS)

Lower provincial revenues and British Columbia’s move to raise corporate taxes won’t sit well with Jim Flaherty as he prepares a 2013 budget that must find a way to erase a $26-billion federal deficit within two years.

The federal Finance Minister has circled March 8 as the day for his pre-budget meetings with private-sector forecasters, who will be analyzing this week’s data from the provinces before providing updated forecasts to Mr. Flaherty.

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Finance Canada relies on an average of growth forecasts from private-sector economists to underpin the budget numbers. The timing of this year’s meeting with economists suggests the 2013 budget will come in late March.

Ottawa already projected worse-than-expected finances in Mr. Flaherty’s November fiscal update, and Tuesday’s provincial news is unlikely to give Ottawa’s Conservative government hope that fiscal fortunes have improved.

Ottawa does not collect direct resource revenue through royalties, but the general downward trend will have some impact on national finances. The most direct hit could come through corporate tax revenue, should lower profits lead to a reduction in corporate revenue. Alberta’s numbers released Tuesday may ease that fear somewhat. Corporate income-tax revenue is higher than projected in Alberta’s March, 2012, budget but slightly lower than mid-year forecasts.

Further, B.C.’s move to raise the corporate tax rate goes against a personal campaign of Mr. Flaherty’s, who has urged the provinces for years to work with Ottawa in billing Canada internationally as a low-tax destination for business.

Financial challenges for the governments of B.C., Alberta and Ontario could also make for more heated debate around the federal equalization program, which Ottawa must renew in 2014. Mr. Flaherty has said the size of the program will be capped at the rate of Canada’s economic growth, and said Ottawa will only consider “technical” changes. But natural resources are a central part of the program’s formula, meaning any tweaks to the way resources are treated will create provincial winners and losers.

Like Alberta, Ottawa has previously signalled that this year’s deficit is coming in higher than expected. Mr. Flaherty’s November fiscal update estimated this year’s deficit would be $26-billion, up from the $21.1-billion he estimated in the March, 2012, budget.

In a speech earlier this month, Mr. Flaherty said lower commodity prices and low inflation (which affects nominal GDP and ultimately government revenues) will mean tougher decisions around spending.

Still, Mr. Flaherty said the lower expectations for revenues won’t force him to “slash and burn.” He also said he still expects to balance the budget by the 2015-16 fiscal year.

Monthly tracking of this fiscal year’s federal deficit has been a bit of a “head scratcher,” TD senior economist Sonya Gulati has noted. As of November, the deficit stood at $12.4-billion, which she said would work out to a year-end deficit of about $22-billion.

Finance Canada will release its fiscal update for December before the end of this month.

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