Federal budget to be balanced early, watchdog says

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Federal finances are on track to return to surplus one year ahead of schedule but could also fall back into a string of deficits starting in 2017-18, according to a new report by the Parliamentary Budget Officer.

Further, the federal budget watchdog says the government will be posting surpluses largely by ignoring its own pledge to run the Employment Insurance program on a break-even basis.

The PBO report presents its view of Ottawa's books on a "status quo" basis, meaning the numbers are presented without attempting to factor in any decisions the government may take in Tuesday's federal budget.

The report projects that Ottawa will post a $3.4-billion surplus in 2014-15. That would be a year ahead of when the government has said lately that it would climb out of deficit. It is however the same target for returning to balance that the Conservatives promised during the 2011 election campaign.

The PBO says Ottawa will then post surpluses of $1.3-billion in both 2015-16 and 2016-17 before running three consecutive years of deficits. The PBO says federal finances are on pace to post deficits of $2.1-billion in 2017-18, $2.9-billion in 2018-19 and $900-million in 2019-20.

The report stresses that these projected deficits are relatively small and that "the government's target of balanced budgets could be achieved with only minor tax changes or spending restraint."

Finance Minister Joe Oliver announced earlier this month that the government plans to bring in balanced budget legislation that would outline steps the federal government must take when faced with a potential deficit.

The PBO report notes that the projection of three years of small surpluses followed by three years of small deficits is mainly due to large planned fluctuations in the Employment Insurance account.

"The setting of the EI premium rate in 2015 and 2016 continues to be a concern," the report states. "The rate freeze was presented as necessary to avoid further increases, although lower breakeven rates were forecast by Finance Canada at the time. This acted against the government's objective of ensuring EI premiums are set transparently and used only for EI benefits and administration expenses. In effect, much of the immediate fiscal room for the recent tax and spending measures is available only by ignoring these objectives."

The government has said it would maintain EI premiums at $1.88 for every $100 in insurable earnings until 2017-18, when the rate will drop to $1.47. The PBO says this would create a $3.6-billion surplus in the EI account for 2015-16. Had rates been set to break even, the PBO says the rate should be $1.71 in 2015-16 and $1.58 in 2016-17.

Melissa Lantsman, a spokesperson for Finance Minister Joe Oliver, said Tuesday's budget will forecast surpluses over the next five years.

"The PBO said will we have a balanced budget," she said in an e-mail.

Ms. Lantsman also defended the government's handling of EI revenue.

"Beginning in 2017, premiums will be set according to a seven-year break-even rate, ensuring that premiums are no higher than they need to be. We will not do what the Liberals did which is use EI premiums paid by workers and businesses as a political slush fund."

Liberal MP Chrystia Freeland said the PBO report shows the government is using higher EI premiums to pay for promises like income splitting that will primarily benefit high-income Canadians.

"The main thing that it says to me is we need to be very careful about trusting the government's numbers," she said. "What we're really seeing is a government whose tax policy is about – in this stealthy way – increasing the amount of money that someone at Tim Hortons has to pay and using that to give tax breaks to the top 15 per cent."

The PBO report also attempts to estimate the fiscal impact of the federal government's announcement this month that it has sold its remaining shares in General Motors, which were obtained as part of Ottawa's role in the auto-sector bailout during the global financial crisis.

Because Ottawa had previously booked $1.2-billion in expected revenue from asset sales in 2015-16, "the contribution to the budgetary balance is only the gain in excess of this amount, which is expected to be roughly $1-billion."