‘Dramatically lower oil prices’ won’t stop balanced budget, Harper says

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Stephen Harper insists his government will post a surplus next year even with dramatically lower oil prices, a strong expression of confidence from the Prime Minister that comes as private sector economists express growing doubt that Ottawa will climb out of deficit next year.

Speaking at a Quebec City event in which he announced $35.7-million for heritage sites, Mr. Harper said he is certain the federal government will return to surplus next year.

"You should be under no doubt that the government will balance its budget next year. We are well within that range, even with dramatically lower oil prices, we will balance the budget," he said.

Mr. Harper's government is currently projecting a $1.6-billion surplus for 2015-16, a figure that is based on assumption that the price for North American crude will average around $81 (U.S.). The price of oil has since dropped significantly, trading around $56 this week.

Still, the Prime Minister acknowledged the lower oil prices will affect the government's "flexibility." While he did not specify what that means, the Conservatives are planning a 2015 pre-election budget and this could limit the amount of new spending or tax cuts that the government could announce.

While lower oil prices hurt energy-producing provinces like Alberta, Saskatchewan and Newfoundland and Labrador, they can benefit manufacturing provinces like Quebec and Ontario, especially with a lower Canadian dollar. Overall, the impact is negative for economic growth in Canada, which translates into less tax revenue coming in to Ottawa.

The government has also set aside a $3-billion contingency for unforeseen events. Several economists said this week that the contingency reserve should be enough to maintain a small surplus, but that it will be close.

Bank of Montreal chief economist Doug Porter told The Globe this week that fluctuating oil prices amount to a "huge wild card" for finance ministers that will make it very difficult to produce economic forecasts.

"It looks like [Ottawa] might still be able to claw out a surplus if absolutely everything went right from here, but we know better than to expect everything to go right. So I think very much they're at risk of remaining in deficit in the next fiscal year based on today's oil prices," he said.

Economists generally say it makes little practical difference whether or not Ottawa is in a small surplus or deficit, provided that long-term trends are positive. However the Conservatives have made a balanced budget by 2015-16 a key political pledge.

The 2011 Conservative election platform promised to eliminate the deficit in 2014-15 – the current fiscal year. The government's fall fiscal update indicated that that likely would have occurred if not for the government's new policy measures, which include tax breaks for small business and Canadian families with children under 18. The Prime Minister has previously said Ottawa will post a deficit in 2014-15.

Mr. Harper said Tuesday that lower prices will have an impact on revenue, but indicated it will not be enough to eliminate the surplus.

"The only question will be how much flexibility we have in the short term. This will obviously reduce some of our fiscal flexibility but it will not, by any means, stop us from reaching a balance and at the same time, as you know, making the important investments we've made," he said.

Unprompted, Mr. Harper then went on to note the impact of lower oil prices on Russia.

"A you know, the fall of oil prices is having important effects around the world. There are economies a lot more dependent on the oil price than Canada's, or frankly than Alberta's, and one of them is Russia," he said. "I think we are all noticing the difficulties that are emerging in Russia, partly because of falling oil prices, partly because of poor governance of the economy and also partly because of sanctions that have been imposed by us and by our allies and obviously as these factors bite, we encourage Mr. Putin to respect the sovereignty and territorial integrity of its neighbours and also to act in a way that's less aggressive towards the international community."