Finance Minister Jim Flaherty's latest forecast suggests he is now assuming the worst for the next couple of years, after proving critics right this week by acknowledging his June budget numbers were too rosy.
Tuesday's fall economic update lowered Ottawa's expectations for government revenues, pointing to the fact that private-sector economists recently downgraded their own growth forecasts for the Canadian economy.
But Mr. Flaherty went further than that. Not only do the government's latest numbers account for slower growth, they also build in a new multi-billion-dollar cushion to cover the possibility that the economy really takes a hit.
While the 2011 budget included downward "adjustments for risk" that work out to $1.5-billion less in assumed annual revenues, Tuesday's update boosts those numbers substantially. The risk adjustment now totals $10.5-billion over the next two and a half years.
RBC Chief Economist Craig Wright predicts deficits will actually come in smaller than what Ottawa now forecasts given the newly added cushion.
"It's the worst-case outcome," he said, in describing the government's latest assumptions for revenue.
Mr. Wright said that a combination of factors will allow Mr. Flaherty to beat his new numbers, including this added cushion, the likelihood that growth should exceed what the government now assumes and the fact that Mr. Wright believes Ottawa will easily meet – if not exceed – its targets for spending cuts. Economists disagree on that last point, however, as some, including TD Bank economist Sonya Gulati, are skeptical that $4-billion a year in permanent savings will be easily found.
The opposition, meanwhile, insists Mr. Flaherty's update shows he's still not taking the economic threat seriously enough.
In a speech to Toronto's Economic Club of Canada Wednesday, Interim Liberal Leader Bob Rae accused Mr. Flaherty of underestimating "just how serious this crisis is," and that it could produce "catastrophic" results.
Mr. Flaherty explained this week that he's added a larger cushion between now and April, 2014, because that's where forecasters warn the risk is greatest. However, from a planning point of view, the government has left itself a relatively tiny cushion of just $1.5-billion a year in the last three years of its forecasts.
"We're living in a highly uncertain world, and that's why we've built in a large risk adjustment in this budget, particularly in the near term, because that's where the greatest global uncertainty is," Mr. Flaherty told reporters Tuesday.
That pattern of shrinking cushions in the outer years runs contrary to the practice of the Liberal government when it erased the deficit in the late 1990s. During that period, then-finance minister Paul Martin adopted a practice in which the Department of Finance gave itself a $4.5-billion cushion that increased by $1.5-billion for each year into the future that the government was forecasting.
The rationale then was that since it's harder to predict revenue four or five years down the road, the cushion should rise over time. In practice, this led to a string of surpluses that infuriated the then-Conservative opposition who viewed it as a clear sign that taxes were too high.
"Martin was the guy who basically invented the prudence concept in budgeting and I think it was politically very smart – under-promise, over-deliver – but he actually ended up getting criticized for that as well because the prudence factor became so large," said McGill economics professor Chris Ragan, who has served as a visiting economist at Finance Canada. "So I guess there's a bit of a balance here. You want to be prudent, but you don't want to be deceptive."