Strong job growth and tight spending will allow Finance Minister Joe Oliver to confirm Ottawa is poised for years of budget surpluses, but Wednesday's fiscal update is expected to show much of that extra cash has already been dedicated to tax cuts for Canadian families.
The revised forecast that Mr. Oliver will release to a business audience in Toronto is set to highlight surpluses starting next year that leave little room for major new tax cuts or spending announcements.
That scenario – which is the result of near historic lows in both government spending and revenues as a percentage of the economy – fits with Conservative pledges of low taxes and smaller government. It also presents a clear challenge for the opposition New Democrats and Liberals, both of whom have promised to increase spending in big-ticket areas.
An analysis from the Parliamentary Budget Officer estimates that the impact of the Conservative government's recent Family Tax Cut package is that projected surpluses of roughly $10-billion a year will be reduced on average to $5-billion a year over the next five years.
Finn Poschmann, vice-president of policy analysis with the C.D. Howe Institute, said the Conservatives will likely leave themselves with enough fiscal room to make further announcements in the 2015 budget, at which point virtually all future surpluses will have been accounted for in terms of tax cuts or new spending.
"What we've seen here is an expected surplus that has been prespent, in a sense," he said, noting that governments of all political stripes and at all levels tend to lock in their financial plans ahead of an election.
The government does have further wiggle room in the form of an annual $3-billion "adjustment for risk" that is buried in the budget numbers to cover unforeseen events. When that amount is not spent, it goes toward Ottawa's bottom line at the end of the year. Ottawa sometimes uses fall fiscal updates to cut this adjustment in half in recognition that the fiscal year is more than halfway through.
In light of all of the uncertainty related to the global economy and commodity prices, Mr. Poschmann said the federal government would be wise to leave a contingency of at least $3-billion in place.
Over the first 10 months of 2014, employment gains are averaging more than 20,000 jobs per month, a significant improvement on the average of 8,250 jobs per month throughout 2013.
The government's Feb. 11 budget estimated the unemployment rate would gradually drop to 6.6 per cent in 2015, but the unemployment rate has already hit 6.5 per cent, according to Statistics Canada's October job numbers.
That should translate into higher-than-expected federal tax revenue and lower costs for unemployment benefits.
The recent decline in oil prices will have a negative impact on federal finances, but the update is expected to show to what degree that is offset by economic gains resulting from a stronger U.S. economy and lower Canadian dollar combining to fuel exports.
Former parliamentary budget officer Kevin Page, who is now a research chair at the University of Ottawa, said the update should present a positive picture of federal finances.
"Over all, the fiscal situation is still very healthy in Canada," said Mr. Page.
Over the longer term, however, Mr. Page said the projections should encourage a debate over whether such low spending rates are sustainable, especially when provinces will face growing pressures in areas such as health care.
"The federal share of health-care spending is going to drop very quickly in this scenario. Is that sustainable?" he asked.
"The provinces still have a [collective deficit] and there's no conversation going on now about health care and how we're going to control costs. … Those are still big question marks."