Skip to main content

Bank of Canada Governor Stephen Poloz holds a news conference on the Bank of Canada’s decision to reduce the overnight rate Wednesday January 21, 2015 in Ottawa.Adrian Wyld/The Canadian Press

The Conservative government is standing by its plans to deliver a balanced budget even as the Bank of Canada shocked financial markets with an interest-rate cut aimed to counter lower-than-expected inflation and economic growth.

Finance Minister Joe Oliver, who is in Davos, Switzerland, for meetings of the World Economic Forum, said balancing the budget is an "ethical issue" that ensures fairness between generations.

"We think it's wrong to burden our children, our grandchildren with expenditures that we're incurring today, so we think a balanced budget is important and we're going to achieve it," he told CNBC in an interview.

The minister maintained his positive tone about the economy after Bank of Canada Governor Stephen Poloz warned lower oil prices will be "unambiguously negative" for Canada in 2015 and subsequent years.

Economists were scrambling Wednesday to absorb and assess the impact of the Bank of Canada's surprise move and said it was too soon to say how the decision – and its ensuing impact on the Canadian economy – will influence Ottawa's bottom line.

The Conservative government's fall fiscal update projected a $1.9-billion surplus for 2015-16 based on an assumed oil price for the North American benchmark West Texas intermediate of $81 (U.S.) a barrel. The bank's growth forecasts Wednesday assumed a constant WTI price of $55 a barrel. In its quarterly Monetary Policy Report, the bank noted that forecasts for economic growth can vary significantly based on the assumption used for the future price of oil.

Mr. Poloz explained that starting in April of last year, the bank moved away from trying to estimate future prices as part of its growth forecasts. Instead, it uses the current – or "spot" price – that is based on a recent average.

"We did a study which examined the historical performance of such forecasts and we concluded that it would be more honest for us to use just a fixed assumption for oil prices. It's too risky a variable to pin your whole forecast on a forecast of oil," said Mr. Poloz.

Mr. Oliver's November fiscal update used a spot price of $81 a barrel, but the minister has suggested that that practice was an exception that won't be repeated in the 2015 budget. Private-sector economists have pointed out that forecasts for Ottawa's bottom line vary by billions of dollars depending on the oil price used in the forecasts and whether it is assumed that prices will rise or remain constant.

Mr. Oliver announced last week that he would delay the release of the 2015 federal budget until at least April in order to give the government more time to assess the economic and fiscal implications of lower oil prices, which have dropped by more than half since June. NDP and Liberal MPs say the bank's actions prove the government's economic plan isn't working.

Lower oil prices have several negative implications for federal revenue. The most direct impact is that lower oil prices contribute to lower inflation as the cost of transportation and manufacturing decreases. Nominal Gross Domestic Product – which includes GDP and inflation – is used to forecast government revenues. However, the Bank of Canada does not release figures for nominal GDP. On Wednesday, the bank did lower its forecast for 2015 GDP from 2.4 per cent to 2.1 per cent and expressed concern about low inflation.

But lower inflation also has positive fiscal impacts. Major transfer programs that are indexed to inflation – such as Old Age Security and equalization – will be less expensive. Also interest rates that are lower for longer than expected mean Ottawa and the provinces will save money on interest payments.

The Parliamentary Budget Office is expected to release a report next week that will assess all of these variables and conclude that the overall impact on Ottawa's bottom line is negative.

Further complicating the picture is the need for economists to assess the impact of the Bank of Canada's interest rate cut. In the wake of the announcement, the Canadian dollar shed 1.53 cents to close at 81.07 cents U.S. A lower dollar is generally viewed as good news for Canadian manufacturers and exporters, and federal parties are already campaigning to win Southern Ontario ridings where manufacturing is a key source of employment.

"You've just got so many moving parts," said Derek Burleton, deputy chief economist for the Toronto-Dominion Bank. Mr. Burleton said his colleagues are working to update their own models as to how all of the recent developments will influence economic growth and government budgets.

"We've got to come up with new numbers," he said.

Your Globe

Build your personal news feed

Follow the author of this article:

Check Following for new articles