Bank of Canada forecast threatens Conservatives’ balanced budget

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The Conservative government's heralded return to balanced books is suddenly at risk as the Bank of Canada projects significantly slower growth for 2015.

The Bank's Monetary Policy Report forecasted Wednesday that the Canadian economy contracted in the first half of the year and will grow by just 1.1 per cent for 2015 as a whole. That's down from the bank's April forecast of 1.9-per-cent growth in 2015.

Should that latest forecast prove to be accurate, economists say it would put the federal government's $1.4-billion surplus for 2015-16 at risk of turning into a deficit.

The April federal budget, which was based on an assumption of 2-per-cent growth for 2015, includes a rough estimate that said a one-year, one-percentage point decrease in economic growth would trim $4.1-billion from Ottawa's bottom line.

Bank of Montreal chief economist Doug Porter said there are some small, positive offsetting factors like lower interest costs, but overall he estimates that such growth figures would hurt the federal bottom line by about $3-billion.

"This could just push them into a small deficit for the current fiscal year, but it's very close," said Mr. Porter. Toronto Dominion Bank economist Randall Bartlett said lower growth will have an impact.

"It will make it challenging for them to have a surplus this year," he said.

The Conservatives have made the return to balance a key political priority, even though economists say there is little real significance as to whether Canada runs a small surplus or a small deficit.

The 2015 budget was focused on delivering tax cuts first promised in the 2011 campaign that were contingent on a return to federal surpluses.

The Conservative Party is promoting itself as the best option for economic management ahead of the October 19 election, but opposition parties argue this year's downturn shows the government's policies have not worked.

Whether the federal government actually posts a surplus in 2015-16 won't be known for sure until the fall of 2016, well after this year's election.

Finance Minister Joe Oliver is standing by the government's timeline. The minister's spokesperson, Melissa Lantsman, said the government "remains on track for a balanced budget in 2015."

Prime Minister Stephen Harper's spokesperson Stephen Lecce released a politically charged statement in the wake of the central bank's report claiming that the global economy "is being dragged down by forces beyond our borders." Mr. Lecce warned against the "unnecessary risks" of the NDP and Liberal economic polices.

"Justin Trudeau is just not ready to be Prime Minister," wrote Mr. Lecce of the Liberal Leader before focusing on the NDP Leader. "Thomas Mulcair is offering the same high-tax, high-debt policies that created the type of chaos we see in Greece today."

NDP MP Guy Caron said the Conservatives are to blame for failing to change course in response to falling oil prices. He noted that the Prime Minister announced a major package of tax cuts in the fall of 2014 – including enhanced child-benefit payments and income splitting for parents with children under 18 – yet chose not to delay or scale back those measures with the April budget when economic circumstances changed.

"They have been asleep at the wheel," said Mr. Caron.

Liberal MP Ralph Goodale said the federal government's fiscal policies are undermining the bank's efforts to promote economic growth.

"It's clear that they are just doubling down on the current set of policies, which are currently failing," he said.