Finance Minister Joe Oliver is signalling he will change his department's approach to calculating future oil prices, an accounting decision that will have a dramatic impact on the Conservative government's election-year bottom line.
When Mr. Oliver released his fall economic update on Nov. 12, Finance Canada officials assumed for the purposes of making revenue forecasts that oil prices would remain at their current levels over the next five years. At that time, the price of North American crude stood at $81 (U.S.) per barrel, a price that has since dropped to six-year lows. Crude oil closed at $48.48 Wednesday, up from $45.89 the day before.
However, when asked at a news conference in Vancouver on Wednesday, Mr. Oliver suggested he may not maintain that accounting practice in the upcoming 2015 budget. He said the methodology used in the fall update, which assumed a constant price for oil, was "the appropriate approach" at the time, but he said he would rely on private-sector economists for his approach to the budget.
Using private-sector forecasts – some of which see oil prices rising later this year – would add billions to the government's revenue projections. Mr. Oliver's fall fiscal update projected a $2.9-billion deficit for the current fiscal year and a $1.9-billion surplus in 2015-16. The Finance Minister restated his view Wednesday that the government will balance the books in 2015-16.
The minister did not say exactly how oil prices would be estimated in the upcoming budget, but he indicated his numbers will count on a rebound in prices.
"While we're certainly not in the business of forecasting where prices will go, certainly one thing is clear from history: It's when prices fall a lot, they tend to go back up. So we'll take that into account as well," he said.
The Bank of Canada announced in April, 2014, that rather than relying on estimates of future prices, its forecasts would assume that energy prices remain near their current levels. The bank said research proves this approach produces "a more accurate forecast."
But observers say Finance Canada officials are likely facing pressure behind the scenes to produce a budget that delivers on the Conservative government's balanced-budget promise, even though lower oil prices make achieving that goal more difficult.
Finn Poschmann, the vice-president for policy analysis with the C.D. Howe Institute, said using the current price of oil is the right thing to do from an intellectual perspective. "Given the present mood and outlook, that will take some steely nerves," he said.
The Toronto-Dominion Bank released a report this week that assumed an average oil price of $67.50 a barrel in 2015 and $80.25 in 2016, which the report's author acknowledged is likely optimistic. For comparison purposes, the report also showed the impact of assuming a constant price of $40 a barrel.
Using TD's assumptions of a price rebound still translated into a $2.3-billion federal deficit in 2015-16 and a $600-million deficit the following year. Using a constant price of $40 per barrel, the 2015-16 deficit would grow to $4.7-billion and the 2016-17 deficit would be $2.4-billion.
Mr. Poschmann and other analysts, including former finance department deputy minister Scott Clark, say it might be easier for the Conservatives to show a surplus in the current fiscal year than it will be in the fiscal year starting April 1, given the timing of the economic bad news from falling oil prices.
Mr. Clark notes that the federal revenue forecasts rely on nominal Gross Domestic Product, which is a measurement of both economic growth and inflation growth. The drop in oil prices will significantly reduce inflation, translating into a direct hit to Ottawa's bottom line.
Given the government's insistence that it will post a surplus in 2015-16, Mr. Clark said many people will be watching very closely as to how the numbers are derived in the upcoming budget.
"If the government tries too hard to show a surplus, in other words twists and turns in the wind and does everything to show a surplus, I think you lose political and professional creditability," he said. "The reality is a lot has changed and if I were the Conservative government, I'd be saying 'that's the fact.' Things have changed and we should just realize that and deal with it."
With a report from Mike Hager in Vancouver