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mind on the money

Parliamentary Budget Officer Kevin Page.Chris Wattie/Reuters

Kevin Page is used to being out of step with Finance Minister Jim Flaherty.

But now the Parliamentary Budget Officer is offering a contrarian challenge to Canada's major private-sector economists.

In a new report published Wednesday, the Parliamentary Budget Office said it will no longer rely - as Finance Canada does - on an average of forecasts by private-sector economists to underpin its assumptions for growth and government revenue.

The PBO argues this will enhance the office's independent analysis on the state of the nation's finances.

The PBO's own view is more pessimistic than the private-sector average, which in turn leads the office to maintain its view that the federal government's budget deficit will not be erased by 2015-16, Ottawa's original timeline. The Conservatives promised during the election campaign to move up that target for returning to surplus by one year.

"Looking ahead, the PBO projects that sluggish U.S. growth combined with the Canadian dollar remaining above parity will subdue near-term growth in the Canadian economy and restrain the decline in the unemployment rate," the report said.

While the PBO agrees with the private-sector average estimate of 2.9-per-cent growth this year, it projects 2.2-per-cent growth for 2012 (compared to the private-sector average of 2.8 per cent) and 2.3 per cent for 2013 (below the 2.7-per-cent average.) The PBO agrees with the private-sector estimate of 2.5 per cent growth in 2014 and projects higher growth that the private sector economists do for the years 2015 and 2016.

In contrast, the Bank of Canada also projects 2.9-per- cent growth in 2011, but 2.6 per cent in 2012 and just 2.1 per cent for 2013, lower than both the PBO and private-sector-average forecasts.

The PBO report does not include measures in the March, 2011, budget, which was not approved by Parliament. That budget outlined a new process for finding up to $4-billion a year in savings by reviewing direct federal spending on programs.

That process is what underpins the Conservative promise that the government can balance the books ahead of schedule.

Following the election, that plan was given further momentum when Prime Minister Stephen Harper appointed ministers to a special committee of cabinet in order to implement the plan.

New Treasury Board President Tony Clement will be in charge of finding those savings.

Without factoring in that process, the PBO estimates that Ottawa is on track to post a $7.3-billion deficit in 2015-16, rather than the $3.8-billion surplus promised in the March budget.

Douglas Porter, BMO's deputy chief economist, said the PBO's numbers are not that far off from what he and other economists are forecasting. Mr. Porter also noted that Finance has recently started to include a slightly downward revision to the private-sector average, which would bring Finance and the PBO's numbers closer.

Mr. Porter met with Mr. Flaherty and other economists Tuesday in Toronto, where the minister decided not to revise the average forecast that was used for the March budget.

Mr. Porter said those numbers now appear a "shade optimistic," given slow growth in the U.S., but are still a reasonable projection for Ottawa to use.

The economist said the average has proven to be a useful tool for government since it was first adopted in the 1990s.

"I think there's a lot of wisdom in the consensus," he said.

Former finance official Peter DeVries praised the PBO's move and said Finance Canada should do the same. He notes that while the government should consult the private economists, creating an average leads to problems because some private-sector forecasts are more thorough than others. He said that for some in the average, the outlying years are little more than a "back of envelope" calculation.

"I also believe that the government should take full responsibility for its economic and fiscal forecasts and not hide behind the private sector," he said.

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